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Class 11 Business Studies Chapter 2 Forms of Business Organisation
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Forms of Business Organisation
VERY SHORT TYPE QUESTIONS ANSWERS (1 MARK EACH)
1. The structure in which there is separation of ownership and management is called.
(a) Sole proprietorship.
(d) All business Organisations.
And: (c) company.
2. The karta in Joint Hindu family business has.
(a) Limited liability.
(b) Unlimited liability.
(c) No liability for debts.
(d) Joint liability.
Ans: (a) Limited liability.
3. In a co-operative society the principle followed is
(a) One share one vote.
(b) One man one vote.
(c) No Vote.
(d) Multiple votes.
Ans: (b) One man one vote.
4. The board of directors of a joint stock company is elected by.
(a) General public.
(b) Government bodies.
Ans: (c) Shareholders.
5. The maximum number of partners allowed in the banking business are.
(c) No limit.
Ans: (b) Ten.
6. Profits do not have to be shared this statement refers to.
(b) Joint Hindu family business.
(c) Sole proprietorship.
Ans: (c) Sole proprietorship.
7. The capital of a company is divided into number of parts each one of which is called.
Ans: (d) Share.
8. The Head of the Joint Hindu family business is called.
Ans: (c) Karta.
9. Provision of residential accommodation to the members at reasonable rates is the objective of.
(a) Producers Co-operative.
(b) Consumers Co-operative.
(c) Housing Co-operative.
(d) Credit Co-operative.
Ans: (c) Housing Co-operative.
10. A partner whose association with the firm is unknown to the general public is called.
(a) Active partner.
(b) Sleeping partner.
(c) Nominal partner.
(d) Secret partner.
Ans: (d) Secret partner.
Short Answer Questions
1. For which of the following types of business do you think a sole proprietorship form of organisation would be more suitable and why?
(a) Grocery store.
(b) Medical store.
(c) Legal Consultancy.
(d) Craft centre.
(e) Internet cafe.
(f) Chartered accountancy firm.
Ans: (a) Grocery store.
2. For which of the following types of business do you think a partnership firm of organisation would be more suitable, and why.
(a) Grocery store.
(b) Medical clinic.
(c) Legal consultancy.
(d) Craft centre.
(e) Internet cafe.
(f) Chartered accountancy firm.
Ans: (f) Chartered accountancy firm.
3. Explain the following terms in brief.
(a) Perpetual Succession.
(b) Common seal.
(d) Artificial person.
Ans: (a) Perpetual Succession: The company has a permanent existence. The shareholders may come or may go but the company will go on forever. The continuity of the company is not affected by death, lunacy or insolvency of its shareholders. The company can be wound up only by the operation of law. The shares of the company may change hands a number of times, but the continuity of the company is not affected at all.
(b) Common seal: A company being an artificial person cannot put its signatures. The law requires every company to have a seal and get its name engraved on it. The seal of the company is affixed on all important documents and contracts as a token of signature. The directors must witness the affixation of the seal.
(c) Karta: All the affairs of the joint Hindu Family are controlled and managed by one person who is known as ‘Karta’ or ‘Manager’. He is having a very unique position which no other office of any organisation in the world is having. He works in consultation with other members of the family but ultimately he has a final say. The liability of ‘Karta’ is unlimited but the liability of other members is limited to their shares in the business. According to Hindu law, the senior most male member of the family is “karta’ by virtue of his position in the family. However, there can be a deviation from this and a junior male member can be a “Karta’ provided all coparceners agree to it.
Karta’s powers are almost unlimited. He acts on behalf of the other members of the family but is not like a partner. Neither he is accountable to anyone nor he is to prepare accounts. No one can ask what was the income and what was the expenditure. He is the great of the grand show.
(d) Artificial person: A corporation is an artificial being, invisible, intangible and existing only in contemplation of the law. Being a more creation of law, it possesses only the properties which the charter of its creation confers upon it either expressly or as incidental to its very existence. A company is a creation of law and exists independent of its members. Like natural persons, a company can own property, incur debts, borrow money, enter into contracts, sue and be sued but unlike them it cannot breathe, eat run, talk and so on. It is therefore, called an artificial person.
4. Compare the status of a minor in a Joint Hindu Family Business with that in a partnership firm.
Ans: The following are the differences between the two:
(i) Governance: Partnership firm is governed by the Indian partnership Act whereas the Joint Hindu Family firm is governed by the two schools :
(b) Dayabhaga, of Hindu law.
(ii) Creation: The partnership firm is created by the mutual agreement between the partners, which may be written or oral. Their relationship is contractual whereas for the creation of Joint Hindu Family firm no such contract is required.
(ii) Legal Position: The partnership firm has a legal entity and identical to its partner in the eyes of law, whereas the Joint Hindu Family is not having any separate and distinct legal entity from its members.
(iv) Number of Members: In partnership firm the maximum number of members is fixed. It is ten in case of a banking business and twenty in other cases. But there is no such maximum number fixed in case of Joint Hindu Family Firm. It can consist of any number of members.
(v) Admission: A new partner can be admitted to partnership only with the consent of other partners. But in case of Joint Hindu Family firm, the birth of a person in family brings him in the folds. However, one can also be admitted by adoption or by marriage to male member of the Family
(vi) Position of a minor: A minor cannot become the partner in the firm. He can, however, be admitted to the benefits of firm with the consent of other partners. But in Joint Hindu Family firm there is no such restriction and a child, as soon as he is born, becomes the members.
(vii) Management: Every partner can take active part in the management of partnership firm whereas in joint Hindu family firm the power to manage is centralised in the hands of karta.
(viii) Outside position of a members: In partnership firm each partners is the agent of the other and is having the authority to bind the firm with his dealings. But in Joint Hindu Family firm this authority is not available to any member except karta.
(ix) Accounts: Accounts are to be properly maintained and any partner can inspect the accounts at any time in case of partnership firm. But in Joint Hindu firm karta is not under any obligation to maintain Accounts. No member can even ask for the accounts from karta.
(x) Liabilities: The liabilities of partners in partnership firm are unlimited. Their responsibility is Joint and several. For the business liabilities, the private properties of partners are also liable in addition to their share in the business. But in joint Hindu family firm the liability of karta is unlimited. All the other members are having limited liability to their respective undivided shares in the Joint family property. The self acquired property of a member cannot be held liable in any case.
(xi) Dissolution: Partnership firm can be dissolved on the death or insanity of a partner. On the other hand the continuity of a joint Hindu Family firm is not affected by death or insanity of a member. Only partition can bring it to an end.
(xii) Registration: It is not compulsory but advisable for a partnership firm to enable it to enforce a claim against outsider. But in case of Joint Hindu Family firm it is not at all necessary.
5. If registration is optional, why do partnership firms willingly go through this legal formality and get themselves registered? Explain.
Ans: Though the registration of a partnership is no compulsory, yet it has many advantages The registration of a firm is not only advantageous for the firm but also for those who deal with it. The following advantages are derived from the registration of firm
(i) Advantages to the firm: The firm gets a right to the third parties in civil suits for getting its rights enforced. In the absence of registration, the firm cannot see outside partners in courts.
(ii) Advantages to creditors: A creditor can see any partner for recovering his money due from the firm. All partners whose names are given in the registration are personally responsible to the outsiders. So creditors can recover their money from any partner of the firm.
(iii) Advantages to Partners: The partners can approach a court of law against each other in case of dispute among partners. The partners can sue outside parties also for recovering their amounts, etc.
(iv) Advantages to Incoming parties: A new partner can fight for his rights in the firm if the firm is registered. If the firm is not registered then he will have to depend upon the honesty of other partners.
(v) Advantages of out going Partners: The registration of a firm benefits the outgoing partners in a number of ways. The out going partners may be divided into two categories
(i) on the death of a partner.
(ii) On the retirement of a partner.
On the death of a partner his successors are not responsible for the liabilities incurred by the firm after the date of his death. In case of a retiring partner, he continues to be responsible up to the time he does not give public notice. The public notice is not registered with the Registrar and he this notice. So, it is essential to get a firm registered for getting these advantages.
6. State the important privileges available to a private company.
Ans: A private company is given certain exemptions and privileges as compared to a public company. So of the main privileges are as follows.
(i) A private company can be started with just two members whereas a public company requires at least seven members.
(ii) A private company is not required to file a prospectus or a statement in lieu of prospectus with the Registrar of companies.
(iii) There is not restriction of minimum subscription as in the case of public company. It can directly allot the shares.
(iv) The company can start its work just after getting a certificate of incorporation. It is exempted from getting the certificate of commencement.
(v) It can work with just two directors.
(vi) A private company is not required to hold a statutory meeting and filing a statutory report.
(vii) It is not under legal obligation to offer its issue of shares to the existing shareholders on a pro rate basis as is in the case of a public company.
(viii) Unless other wise a higher quorum is provided, the minimum quorum in a general meeting of shareholders is only two members personally present.
(ix) There is no limit on the remuneration of directors, managers, etc. in a private company. It can be fixed beyond 11 per cent which is a statutory limit for a public company.
(x) Investment in the same group of companies can be done without restrictions.
7. How does a co-operative society exemplify democracy and secularism? Explain
Ans: The management of co-operative societies is always on democratic lines. All the members of a society elect a body of persons to conduct and control the day to day working of the society. The members frequently meet and give guidelines to its executive. The management is elected through ‘One man, One votes’ system. The day to day work is conducted by expert persons but the ultimate control lies with the members. In a co – operative, democracy is move than a system, it is a condition of its business success co-operative business stands or falls with democracy. The membership of a co-operative society is open to all irrespective of religion, caste creed, colour or political affiliation, the co-operative movement can attract a large membership only by staying out of policies where people have divided opinions. Co-operative represents universal brotherhood and it should not lose its path in political contradictions. There is no place for caste or discrimination in co-operatives. The primary aim of co-operatives is to serve its members. So, co-operative societies are neutral as far as political and religions affiliations are concerned.
8. What is meant by ‘partner by estoppel? Explain.
Ans: When a person is not a partner but poses himself as a partner, either by words or in writing or by his acts, he is called a partner by estoppel or by holding out. A partner by estoppel or by holding out shall be liable to outsiders who deal with the firm on the presumption of that person being a partner in the business even though he is not a partner and does not contribute anything to the business.
Long Answer Questions
1. What do you understand by a sole proprietorship firm? Explain its merits and limitation?
Ans: Sole-tradership is the oldest form of the business organisation. In this form of business organisation one person takes the initiative of starting the business. He invests his own resources and bears all the risks of the business. He personally looks after the whole work with the help of his family members. He may employ some persons to work in his business or hire experts for technical works. The liability of sole-trader is unlimited. In case of need he has to satisfy his creditors even from his private property. The competence of the sole trader determines the fate of the business. He is in fact the sole organiser, manager, controller and master of his business
The advantages and disadvantages of a sole trader business are discussed below:
(i) Easy in formation: It is easy to form a sole trader business because no legal formalities are require to be performed in its formation. Anybody desiring to start a sole-trader business can do so. Business is absolutely free from legal formalities.
(ii) Better Control: In sole trader business one man is responsible for all types of activities. He controls every functions of the business He himself takes the decision regarding the various activities of the business in appropriate time. The owner is all in all and he cannot escape his work. He call exercise better control over the business.
(iii) Flexibility in operation: If any change is required in the operation of business, it can be possible without involving much expenditure and performing legal formalities. Bocaneuf being flexible in operation a sele-trade concern is most sunshade for industries dealing in fashionable and seasonal goods.
(iv) Retention of Business Secrets: A sole-trader can maintain his business secrets. He is not to discuss his business secrets to anybody else. He is not to publish his accounts. He can maintain secrecy from his competitors.
(v) Easy to raise finance: A sole-trader can easily get financial help from the creditors by creating goal will in the market. Creditors also do not hesitate in advancing loans to the sole trader because in case of loss the private property of the owner can also be attached to recover the loan.
(vi) Direct motivation: The sole trader takes keen interest in the working of the business. He tries to put his heart and soul in the business to earn as much profit as he can. In sole trade business nobody is there to share to profit except the own.
(vii) Promptness in decision making: A sale trader can take prompt decision in order to avail an opportunity fitted to his business.
(viii) Direct accessibility to consumers: A sole trader can have direct contact with consumers and employees. This helps him in redressal of the grievances of the consumers and employees. It enables him to make necessary changes in the quality and design of his products according to the need of the consumers.
(ix) Inexpensive management: The sole trader is the owner, manager and controller of the business. He does not appoint specialists for various functions. He personally supervise the various activities and can avoid wastage in business. Thus the managerial costs are saved to a large extent.
(x) Self Employment: The sole proprietorship form of business. organisation offers the means of self employment to those who do not want to serve others. As everyone cannot get a suitable job for earning his livelihood, the individual can easily start a small size business.
(i) Limited Resources: The resources of a sole trader are limited : He makes investments from his family. He may try to manage finance from financial institutions but he may not be in a position to offer sufficient securities to these institutions. As a result he may not get the required amount of finance necessary for his business.
(ii) Limited Managerial ability: One person may not be expert for each and every function of a business. He may not be able to devote sufficient time tor all types of activities. The managing capacity of the sole-proprietor is limited. So he will have to depend upon paid employees. But his limited financial resources will not allow him to appoint professional people. Limited managerial capacity will hinder the growth of business.
(iii) Unlimited Liability: The liability of sole trade is unlimited. He may have to assign his private property in discharging the liability of the business if he suffers heavy loss. Unlimited liability also restricts the growth of business activities.
(iv) Uncertain Continuity: The continuity of a sole trader business is uncertain. The business will continue so long the proprietor is there. In case of mobility or death the business is discontinued. The
successor may not have the ability to continue the business.
(v) Limited scope for Employees: Due to limited carrier opportunities, a sole trader cannot attract qualified and efficient persons. As the continuity of sole trader business is uncertain the employees also feel unsecured. Moreover a sole trader cannot offer financial incentive to the employees because his activities are on a small scale.
(vi) No large scale economics: As the sole trader business is on small scale it cannot economics in purchase, production and marketing. In a sole trade concern overhead expenses are also more. So this type of business organisation cannot enjoy the benefits of large scale economics.
(vii) More Risk involved: A sole trader is to take all decisions by himself. So there is a possibility of-taking wrong decisions. This may lead and create difficult situations involving more risks..
2. Why is partnership considered by some to be a relatively unpopular form of business ownership? Explain the merits and limitations of partnership.
Ans: Partnership is considered by some ownership because of the following reasons that there is always like livelihood of lack of harmony amongst the partner. Difference of opinion very often results in disharmony and lack of management, when differences arise, each partner tries to blame the other partner about his dishonest dealings and working against the interest of the firm. This is bound to result in disruption and ultimate dissolution of the firm.
The following are the advantage of partnership firm:
(i) Easy to Form: It is easy to form a partnership firm. No legal formalities are required to be performed for its formation. A simple agreement among the partner is sufficient to start a partnership firm. Even the registration of a firm is not compulsory.
(ii) Large Resources: As there is more than one person in a partnership firm larger amount of capital can be arranged for the business. The partnership concern can also arrange funds from the outside sources.
(iii) Greater Managerial Talent: Greater managerial talent is available in a partnership firm because persons having different talent and knowledge may be taken as the partner of the firm. This will help to increase the efficiency of the business resulting in more profits.
(iv) Promptness in Decision making: The partners meet frequently and they can take prompt decision in any matter for the we are of the business.
(v) Sharing Risk: The risk of business is shared by more persons. The burden of every partner will be much less as compared to the burden of sole trader.
(vi) Relationship between Reward and work: The partners can put more labour to earn more and more profits. There is a direct relationship between reward and work The more they work. The more they will be benefited.
(vii) More possibility of Growth and Expansion: As compared to a sole trade business, partnership concern has more possibilities for expansion and growth of business activities.
(vii) Flexibility of operations: There is no statutory obligation to seek approval from government before making major in the business set up. The changes in the managerial setup, capital arid Scale of operation can be made easily depending upon the business opportunities.
(ix) Secrecy: A partnership concern is not to publish its profit and loss account and balance sheet as is necessary in case of a joint stock company. The partners can keep the business secrets to themselves.
(x) Protection of Minority Interest: Every partner has a right to participate in the management of the business. All important decisions are taken by the consent of all partners.
(xi) Easy Dissolution: No legal formalities are required for the dissolution of a firm. It is easy to start as to dissolve a partnership concern. A partner-ship firm can be dissolved on insolvency, lunacy or death of a partner.
(xii) Democratic administration: All partners can take active interest in the working of the firm. All important decisions of the business are taken with the consultation and consent of all the partners.
3. Why is it important to choose an appropriate form of organization.
Ans: The pattern of ownership is an important decision to be taken before establishing a business enterprise. The forms of organisation are sole proprietorship. Partnership Joint Stock company. Co-operative societies etc. They have their own advantages and disadvantages. The selection of a suitable form of business organisation is an important managerial decision. It provides the best medium for the attainment of business objectives.
The following points are taken into consideration while selecting a form of business organisation.
(i) Easy in Formation: The primary consideration in making the choice is which type or form of organisation can be set up easily or without any difficulty. The important considerations are facility of forming, minimum legal requirement, freedom of payment of fees to state or authority.
(ii) Easy in Raising finance: The other important consideration is the case with which the requisite capital can be raised. Small amount of capital can be invested by the entrepreneur himself and he would be content to put up a business and sale proprietorship of organization would serve the purpose effectively. If a large business requiring huge amount of capital is to be set up, company form of organisation may be necessary which will entail certain formalities to be followed for raising the capital.
(iii) Extent of Liability: This is another important factor in making the choice of a form of business ownership. The extent of liability means the extent upto which one is accountable to law. He is either fully liable or he is liable to a limited extent. In the former one the liability is said to be unlimited, his personal or private estate will be liable for the debt but in the later case the liability is limited and he can be made to pay only to the extent of certain definite limit. Ordinarily he would like a liability where his liability is limited unlimited liability, however, acts as a stimulus for hard work and may result in good gain the greater the extent of liability the greater one could feel his responsibility and risk and hence would always try his best to escape from the risk of the liability which is only possible by doing hard work. He may in that case choose sole proprietorship or partnership.
(iv) Flexibility of operation: A good form of business ownership is one which permits maximum flexibility, as changes can be introduced promptly without any difficulty. Individual proprietorship enjoys to the maximum extent the characteristic of flexibility of operation.
(v) Stability and continuity: The continuity of existence and stability are the essential factors which make an organisation superior in status as against those which lack continuity. The company form of organisation is the only form which ensures stability and continuity. The life span of sole proprietary organisation is not long. This may be closed after the death of its owner. A partnership too does not have a permanent life. It may be dissolved for a number of reasons. Hence, a company form of organisation will be suitable if stability of operation is essential.
(v) Secrecy: Secrecy is of supreme importance, particularly in small business concerns. Accordingly, the entrepreneur would select the sole proprietorship for that reason. In case, he has partners, he will have to carefully weigh whether other partners will be able to maintain the secrecy. He will have to exercise great care in taking partners.
(vii) Government Regulations: Different forms of organisations are subject to various kinds of control exercised by government rules and regulations. In case of sale proprietorship, the government control is minimum. A sole proprietary organisation is not expected to meet any legal requirement. Similarly, a partnership form of organisation is free from government regulations. Even the registration of partnership is not compulsory. But a number of formalities are required to be complied with while incorporating a company. A company is created by the process of law and govt. reserves the right to control its actions more closely than the other two forms of organisations.
(viii) Tax Liability: The basis of taxation is different in each type of organisation. A joint stock company has more tax liability as compared to the sole proprietorship and partnership.
(ix) Decision making Opportunities: Some entrepreneurs, particularly those who attach great value to their own leadership would prefer sole proprietorship as the form of organisation. If a very high leadership is required which he may not possess, he will then be obliged to form a company in order to attract a more able leadership to assume responsibility for the operation of the enterprise.
The above mentioned factors are inter related and cannot be considered singly. The entrepreneur will have to consider all the factors relatively before making choice. The capital requirement and limited liability are also most important factors for taking into consideration before taking a decision.
4. Discuss the characteristics, merits and limitations of co – operative form of organisation. Also describe briefly different types of co-operative societies.
Ans: The characteristics of a co-operative society may be described as follows:
(i) Voluntary Membership: Voluntary membership is the main characteristics of a co-operative society. The members willing to form a co-operative come voluntarily and do so. Nobody is compelled to join a co-operative. Anybody willing if may join or leave the co-operative society as and when he likes.
(ii) Service Motive: Another characteristic of a co-operative is to provide service to their members. The aim of co-operative society is not to earn profit. The service of members is the fundamental objective of a co-operative society.
(iii) Democratic Management: The management of a co-operative society is always on democratic basis. All the members elect a Board of Directors in the general meeting of the society. The Board of Directors frame plans and policies of the society which are executed by the appointed executives.
(iv) One Man One Vote: In a co-operative society every member is given one vote irrespective of his contribution towards the share capital of the society.
(v) Political and Religious Neutrality: The membership of a co – operative society is open to all irrespective of religion, cast and creed.
(vi) Cash Trading: The trading in co-operative is generally carried on the ‘cash basis’. Cash trading ensures economy for the co – operatives.
(vii) Distribution of Surplus: Any surplus arising from the working of a co – operative society is distributed among its members of is spent on their welfare.
(Viii) State Control: The co-operative societies are to follow some rules and regulations framed by the Government for the management of the same.
The various advantages of a co-operatives are discussed below:
(i) Open Membership: The membership of co-operative societies is open to each and every person. There is no bar of joining co – operative societies if enjoy the fruits of a co-operative can join it.
(ii) Service Motto: The co-operative societies are formed not for the purpose of earning profit but, for service. The societies try to promote to create interest of the members.
(iii) Supply of goods at cheaper rates: The co-operative societies purchase goods directly from the producers and sell them at cheaper rates to its members. The middlemen are eliminated from the channel of distribution. The co-operative societies ensure regular supply of goods at cheaper rates.
(iv) Low Management costs: The management of co-operative societies is in the hands of persons elected by the shareholders. Some persons are employed to look after the day-to-day working of the societies. So the societies need not spent large amount of money for management personnel.
(v) Surplus shared by members: The societies sell goods the members on a nominal profit to cover up the administrative costs. The surplus earned by the societies is distributed among the members on the basis of their purchases. Some parts of the profit is spent for the welfare of its members.
(vi) Check on other business: Co-operative societies act as a check on the workings of other forms of business organisation. When businessmen try to exploit consumers supply prices of their commodities, co-operative by raising goods at reasonable prices Then other enterprises will have to lower the prices of their goods.
The limitation of co-operative societies can be explained as follows:
(i) Lack of capital: Generally co-operatives are started by the economically weaker sections of society. The shares are generally of lower denomination i.e. face value to facilitate persons of lower income also to be associated with the societies. The resources of members are not enough to start a large scale enterprise. So co – operative societies suffer from lack of capital.
(ii) Lack of unity among members: As the members of co-operative societies are drawn from different sections of society, there may be lack of harmony among the members. This may again work against the interest of the societies.
(iii) Cash trading: As goods are sold on cash basis in co-operative societies, the poor persons may not be able to purchase the goods all the time on cash. So they are to go credit purchase from private traders who help the consumers by extending credit facilities.
(iv) Political interference: The co-operative societies are generally under the regulations of government. Therefore, co-operative societies have to face interference from governments to the Managing committees. This has some adverse affect in the growth of co-operative societies.
Different type of co-operative societies:
The principal types of business cooperatives are as follows:
(i) Co-operative societies: The societies are voluntary associations of people with moderate means, formed with the objective of providing the short time financial accommodation to their members. These societies are formed with the idea of saving their members from the clutches of money lenders.
(ii) Consumers co-operative societies: These societies are formed by consumers for obtaining their requirement at reasonable prices. Their basic object is to eliminate middlemen. The consumers join together and manage the business. The profit of the business is returned back to the members in the ratio of purchases made by them during the year.
(iii) Co-operative Marketing Societies: Co-operative marketing is essential for marketing the produce of the cultivators at reasonable prices in co-operative way. The main purpose is that the cultivator should get reasonably good price. These are voluntary associations which aim of collectively marketing their produce. The purpose is to save the producer from the clutches of money lenders.
(iv) Industrial co-operatives: An industrial co-operatives society may be defined as a co-operative unit which is formed by industrial labourers or small industrial labourers or small industrialists for the purpose of pooling their resources with the object in creasing their production and marketing their produce. The members join hands as a body and avoid middlemen services both in production and distribution.
(v) Co-operative forming societies: These societies are the voluntary associations of small formers who joint hands as a body and avoid middlemen services both in production and distribution.
(vi) Co-operative forming societies: These societies are the voluntary associations of small formers who join hands with objective achieving the economics of large scale farming and maximising agricultural output.
5. Distinguish between a Joint Hindu family business and partnership.
6. Despite limitations of size and resources, may people continue to prefer sole proprietorship over other forms of organisation? Why?
Ans: A business managed and controlled by one person is said to be best because the owner is free to take initiative for the growth of the business. The following are some of the points is favour of one man control.
(i) Easy Formation: One man business is easy to form. No legal formalities are required to start a business. A person willing to set p a business can do so without loss of time.
(ii) Effective control: Since one person is responsible for running the whole business, he will be able to supervise each and every aspect effectively. He can take quick decision according to the requirement of situation.
(iii) Efforts and Reward linked: One-man control is the source of inspiration to the proprietor because – he himself gets the fruits of his rewards.
(iv) Retaining Business Secrets: One man control of business is helpful for retaining, business secrets. Because maintenance of business secrets is very important for its success.
(v) Personal contact with-consumer: Under one man ownership proprietor directly comes into the contract with consumers. He gets the opportunity to know the consumer behaviour for the products of ‘his business. He will be able to know the individual tastes of the consumers. This will enable him to know consumers patronage for goods.
(vi) Getting all profits: In one man business, owner gets all the profits of the business. This act as a motivator for hard work. As nobody is there to share the profits, the proprietor will put his best effort to accelerate his efficiency and profitability.
(vii) In expensive Management: The owner acts as the manager and controller, so there will be economy in management, He personally supervise every activity and this helps in avoiding wasteful managerial expenses.
(viii) No Legal Restrictions: There is no legal restrictions for starting a sole trading business. He is not to file various returns to the government as in the case of company form of business.
(ix) Cordial Relations with employees: Under one man control there is a direct contact between the owner and employees. So he will be able to know the difficulties of the employees personally and may take the remedial steps as early as possible.
(x) Social Desirability: One man ownership business is generally on a small scale basis. This helps in diffusing concentration of economic power. The wealth will be in the hands of many people.
In pursuance of this discussion, a conclusion can be drawn that one man control is best in the world. The owner is greatly motivated to work hard and improve the working of his business. Of course of this type ownership may not be successful in every type of business. The business can provide sufficient funds and scale of operation should be such which may be easily supervised by him.
ADDITIONAL QUESTIONS & ANSWERS
1. Explain the concept of ‘unlimited liability’
Ans: In case of unlimited liability, the proprietor is responsible for all losses arising from the business. The liability is not limited only to his investments in the business but his private property is also liable for business obligations.
2. Limitations of sole trader
Ans: Limitation of sole-trader are limited resources, limited managerial ability, unlimited liability, uncertain continuity limited scope of employees, no large scale economies etc.
3. Problems of employing a servant
Ans: (i) The employment of a servant will not help in bringing more funds to the business as can be possible when a partner is added.
(ii) A servant will not take as much interest as can be taken by the proprietor or a partner. The servant will be paid a salary; so he will not be much interested in increasing the profitability of the concern.
(iii) Sometimes the employees set up their own units after taking some experience and understanding the working of the business. The sole-trader will face competition from his former employee.
(iv) There is also a difficulty in finding a suitable person for employment. If a wrong person a employed then it will create problems instead of solving them.
4. Flexibility in operations of business of sole trader.
Ans: A sole proprietorship concern is generally run on a small scale basis. In case a change in operation is required, it can be possible without involving much expenditure. Even if a new line of production is to be taken up, it will not involve much efforts. On the other hand, if the operations are on a large scale, then it becomes difficult to change the method of production. A small scale concern can adjust its production according to the changing demand pattern. It can increase and decrease its production as per requirements. Moreover, no legal formalities are required for making changes in operations. A Joint stock company cannot go beyond its objective clause. Because of being flexible in operations, a sole trade concern is most suitable for industries dealing in fashionable and seasonal goods.
5. Explain any two characteristics of a sole trade business.
Ans: (i) Individual Initiative: This business is started by the in initiative of a single person. He prepares the blue prints of the venture and arranges various factors of production. He may employ other persons for assistance but ultimate authority and responsibility lies with him. All the profits and losses are taken by the single individual.
(ii) Proprietor and proprietorship are one: Legally, the sole trader and his business are separate entities. Loss in his business is his loss. Liabilities of the business are his liabilities.
6. Special desirability of sole trade business.
Ans: (i) Employment to large number of persons.
(i) Need of less capital.
(iii) Less risk.
(iv) Providing goods at low prices.
(v) Equal distribution of Income.
(vi) Helpful to small producers.
(vii) Helpful to consumers.
(viii) Act as a training centre.
7. Benefits of employing a servant in sole trader business.
Ans: A sole trade business can be expanded by employing some person and some of the advantages of this system are discussed as follows.
(i) The sole-trader is able to shift some of his responsibilities to his assistant. The assistant will look after the work assigned to him and will work under the overall control of the owner.
(ii) The assistant will be paid a salary and the profits belong to the owner. If a partner is added then he will have a share in profits. It will be better to get the help of a paid employees instead of taking a partner who will share profits of the business.
(iii) The proprietor will be able to retain business secrets because he will not be required to share them with his employer. In some concerns the secrecy of trade or business policies is very important. In such cases the employment of an assistant will be useful.
(iv) There will not be any delay in taking decisions because one person is the final authority in the business. The proprietor can take counselling of his employees but final decision will remain with him.
8. Legal position of sole-trade business.
Ans : Following points will explain the legal position of a sole-trade business.
(i) There is no specific law under which this business required registration etc. A Joint Stock Company has to be incorporated under companies Act, 1956, a partnership firm is governed by Partnership. Act 1932 a sole trading business is not governed by any such nature. So, this business can be started and dissolved at the discretion of the owner without reference to any statutory provisions.
(ii) The sole-trade business will be subject to the general laws of the land. If there is a provision of getting a licence for setting up a particular business, then the sole-trader will also get the licence before setting up such a business. A person desirous of starting a wine shop is expected to get a licence from the state Government. A sole-trader wanting to enter this business will certainly be expected to comply with this law.
(iii) The sole trader and his business are one and the same thing. The business exists only with the sole-trader. If he disappears from the scene due to death or some other reason, then the business will also be dissolved. The proprietor and his business have one personality.
(iv) The liability of the sole trader is unlimited. If a business is dissolved then no distinction is made between business and private assets and business and private loans of the sole-trader.
9. Explain some circumstances, where sole proprietorship business is suitable.
Ans : The form of organisation is also suitable under certain circumstances.
The circumstances are as follows:
(i) Where market is local: When market for a product is limited only to a particular place, scale of business operations will be small. The amount of capital required will be less and the ordinary managerial skill will be sufficient under such situations, sale proprietorship will be most suitable. Most of the retail trade is controlled by sale traders.
(ii) When personal contact with customer is required: The may be a need for personal contact with customers. The customers may have their likings and preferences for particular things under these situations sole proprietorship form of organisation will be suitable. A doctor and a lawyer will be required to have direct contact with his patient and clients. A customer may have his own liking for getting his clothes stitched. So, in all these causes sole proprietorship will be more useful.
(iii) Speculative business: In speculative business the demand and prices of products change quickly. The businessman is required to take prompt decisions. A sole proprietor can take immediate decisions as warranted by the situation. He need not consult anybody else. So, he can decide the things himself. No other form of organisation will be as suitable for speculative business as sole proprietorship.
10. Why is the single proprietorship not in danger of being entire by wiped out by large business houses.
Ans: The factors listed below illustrate how a sole proprietor will be successful against large entrepreneur
(i) Normally, a business is stated as one man venture, because of the many advantages it offers. As the proprietor makes a success of it and is faced with the problem of expansion, he resorts to the formation of the company. If his capital needs are not vast and he wishes to presume his secrecy and family character of business he will form a private company.
(ii) As the proprietor is in close touch with the trade and results are quickly known, the advantage of economic stability, direct motivation, personal contact interest inherent in sole proprietorship sustains one man business along with giant concerns. As a result in the field of distribution, in particular this form of organisation continues to flourish all ones the world.
(iii) In the field of production, too, there are certain industries which can be run successfully only on a small scale. For example, industries whose products cannot be standardised and establishments which attempt to make products to suit the different tastes of consumers can best be owned and run by sole proprietors. Such industries produced tailored suits, high grade furniture, are goods, handicrafts, finally bound books, etc.
(iv) In India, Government has been encouraging individual owners to take up small manufacturing activities by setting up industrial estates and by providing training facilities, as well as by granting financial assistance. The national Small Industries Corporation has been rendering a useful service in this direction.
(v) The vast majority of the service enterprises such as transport and warehousing are normally organised as sole proprietorship. Professional such as chartered accountants, lawyers, doctors, teachers, etc. function only as sole proprietor or partnership.
(vi) It is always economical to run a sole trading business because the sole proprietor knows all that he is spending is going from is pocket. He tries to purchase goods at the lowest rate and tries to make profits as high as possible which is not in the case of partnership etc.
It is clear from the above discussion that single proprietorship is not in danger of being wiped out by large business houses.
11. What is Joint Hindu family business? Discuss the characteristic of Joint Hindu family business
Ans: The Joint Family Business is a distinct form of organisation peculiar to India Joint Hindu Family Firm is created by the operation of law. It does not have any separate and distinct legal entity from that of its members. The business of Joint Hindu Family is controlled under the Hindu Law instead of partnership Act. The membership in this form of business organisation can be acquired only by birth or by marriage to a male person who is already a member of Joint Hindu Family.
Characteristics of a Joint Hindu Family Business : The main characteristics of Joint Hindu Family Business are given below-
(i) Governed by Hindu Law: The business of the Joint Hindu Family is controlled and managed under the Hindu law there are two schools of Hindu law
(a) Dayabhaga and (b) Mitakshara .
(ii) Management: All the affairs of a Joint Hindu Family are controlled and managed by one person who is known as ‘Karta’ or ‘Manager”. The karta is the senior most male member of the family. He works in consultation with other members of the family but ultimately he has a final say. The members of the family have full faith and confidence in Karta. Only karta is entitled to deal with outsiders. But other members can deal with outsiders only with the permission of karta.
(iii) Membership by Birth: The membership of the family can be acquired only by birth. As soon as a male child is born in family, he becomes a member. Membership requires no consent or agreement.
(iv) Liability: Except the karta, the liability of all other members is limited to their shares in the business. The karta is not only liable to the extent of his share in the business but his separate property is equally attachable and amount of debt can be recovered from his separate property.
(v) Permanent Existence: The death, lunacy or insolvency of any member of the family does not affect the existence of the business of Joint Hindu Family. The family goes on doing its business.
(vi) Implied Authority of karta: In a Joint family firm, only karta has the implied authority to contract debts and pledge the credit and property of the firm for the ordinary purpose of the business of the firm.
(vii) Minor also a partner: In a partnership, mirror can not become co-partner though he may be admitted to the benefit of partnership. In a joint Hindu Family firm minor is a partner.
(viii) Dissolution: The Joint Hindu Family Business can be dissolved only at the will of all the members of the family. Any single member has no right to get the business dissolved.
12. Explain the advantages of Joint Hindu family business.
Ans: The chief advantages of Joint Hindu Family Business are given below-
(i) Easy to start: It is very easy to start the Joint Hindu Family Business. No legal formalities are required to be faced such as such as registration. It requires no agreement.
(ii) Efficient Management: The management of Joint Hindu family Business is centralised in the hands of karta of family. In this business karta takes all decisions and gets them implemented with the help of other members. No other member interferes in his management.
(iii) Secrecy: In Joint Hindu Family. Business, all the decisions are taken by the ‘karta’ himself. If is in a position to keep all the affairs, to himself and maintains perfect secrecy in all matters.
(iv) Prompt Decision: The karta is the only person who exercises control and direction ones the business. He may not consult anyone in taking decisions. This ensures prompt or quick decision. Being the sole master he takes prompt decisions and makes advantage of the opportunity.
(v) Economy: For the success of any business economy is a must. It is well balanced and maintained in Joint Hindu Family spends money with great caution and economy.
(vi) Credit Facilities: In Joint Hindu Family Business the credit facilities are more. One reason for this is that liability of the ‘karta’ is unlimited. Karta is having personal relations with others, which are also helpful in raising credit.
(vii) Natural Love between Members: In Joint Hindu Family Business it is the natural love and affection which the members are having for each other. It helps to run the business more efficiently and smoothly.
(viii) Freedom regarding Selection of Business: The karta is at freedom to select any business of his choice. He has not to depend on others.
13. Describe the disadvantages of Joint Hindu Family Business.
Ans: The disadvantages of Joint Hindu Family Business are giver below :
(i) Limited Membership: The membership of the business is limited to the members of family only. No outsider can become the member of Joint Hindu Family Business.
(ii) Limited Sources of Capital: The capital is limited only upto the resources of one family. This is not sufficient to meet the business requirements for expansion. Thus the size of the business remains small. The karta cannot take the advantage of economics of large size due to limited finance.
(iii) Limited Managerial Skill: All the managerial functions which are essential for the successful operation of a business are performed by the karta of the family. The karta may not be able to perform all managerial functions because of limitation of time, energy and skills. Because of limited scale of operations and financial resources, it may not be feasible to secure the services of experts in different fields like purchasing, production and marketing.
(iv) Unlimited Liability: The liability of the karta is not only liable to the extent of his share in the business but his separate property is equally attachable and amount of debt can be recovered from his separate property. This factor puts a ceiling on the growth and expansion of the business.
(v) Misuse of power: The management of a Joint Hindu Family Business is centralised in the hands of karta of the family. No other member can interfere in his management. This may lead to the misuse of power and the karta may use the power for his personal interest.
14. Briefly explain the various types of partners
Ans: There are different kinds of partners and they may be classified in the following manner.
(i) Active Partner: A partner who is actively engaged in the conduct of a business is known as active partner. He may be called a working partner. He takes an active part in the management and administration of the business. His liabilities are unlimited.
(ii) Nominal Partner: A nominal partner is one who does not contribute any capital or share in profits but lends his name and credit to the partnership firm. A nominal partner is liable to third parties who deal with the firm on the supposition that he is a partner in the firm.
(iii) Sleeping or Dormant Partner: A sleeping partner is one who contributes capital, shares profits and contributes to the loss of the firm but does not participate in the working of the business. He is liable for the liabilities of the firm like other partners. The term ‘Sleeping partners’ implies one who is neither an active partner nor known to the public as a partner.
(iv) Partner in profits only: A partner sharing the profits of the business without making himself responsible for losses, if any, is known as partner is profits only. He contributes capital and is also liable to the third parties like other partners. Such partners are not allowed to take part in the management and administration of the business.
(v) Minor as a partner: A minor cannot become a partner in tha partnership firm because according to Indian Contract Act, a minor cannot enter into a contract. However, a minor may be admitted to the benefits of partnership with the consent of all the partners.
(vi) Incoming Partner: A person who is admitted as a partner in an existing partnership is called as incoming partner. A new person can be take as a partner with the consent of all the partners. In coming partner is not liable to the creditors of the firm for anything done before he become a partner.
(vii) Outgoing Partner: A partner leaving the existing firm is known an outgoing or retiring partner. An out going partner is liable for the debts and the obligations increased before his retirement and will be liable for future obligations only if he fails to give public notice of his intention to retire from the partnership firm.
(viii) Partner by Estoppel or Holding out: When a person is not a partner, but he poses himself as a partner by words spoken or written or by his conduct, is called a partner by estoppel or by holding out. A partner by estoppel or holding out shall be liable to the third parties who deal with the firm on the supposition that he is a partner even though he is not a partner. He does not contribute anything to the firm.
15. Different kinds of partnership.
Ans: Different kinds of partnership may be explained as follows –
(i) General Partnership: In this type of partnership the liability of members is unlimited. All the partners personally and collectively are liable for the obligations of the firm. All partners can take part in the working of the business. In India, this kind of partnership exists. The registration of the firm is not compulsory but certain privileges are available to the firm which is registered.
(ii) Particular Partnership: When a partnership is started for certain work it is called particular partnership. When the work is completed the partnership comes to an end. The partnership may also be for a limited period. It will be dissolved at the expiry of that period.
(iii) Partnership-at-will: This type of partnership is neither for a fixed period for a particular purpose. The partnership-at-will continues upto the time the partners have faith in each other. The life of partnership is not limited by time and work. It can be dissolved when all the partners want dissolution or any one of the partners gives notice for dissolution of the firm. The strength of this partnership depends upon the mutual trust and confidence among the partners.
(iv) Limited partnership: In general partnership, the liability of partners is unlimited. This discourages those persons who want to invest money in business but don’t want to risk their private property. These persons can risk their investments in the firm but not beyond. The limited partnership provides them an opportunity for investment. In limited partnership the liability of some partners is limited while liability of some partners is unlimited. The partners with limited liability are called special partners while those with unlimited liability ane called general or active partners. The liability of special partners is limited only to their capital in the business while liability of general partners can go beyond their capital. The limited partnership is not prevalent in India and is not allowed under partnership Act. This kind of partnership is prevalent in U.S.A. and Several European Countries.
16. Give the procedure of registration of partnership firm. Is Registration of the firm compulsory? What are the consequences of non-registration firm.
Ans: The registration of the firm is not compulsory but it should be registered with the Registrar of Firm soon after its formation. Because an unregistered firm cannot sue outsiders although outsiders can sue the firm
Procedure of Registration: A partnership firm can be registered by providing the following information to the Registrar of Firms –
(i) The name of the firm.
(ii) The principal place of the business of the firm.
(iii) The names and addresses of the partners.
(iv) The names of the places where the firm has its branches.
(vi) Date of the commencement of the business of the firm.
(vii) Dates on which the various partners jointed the partnership firm.
(viii) The direction of the partnership firm.
The statement providing the above mentioned information should be submitted along with prescribed fees and must be signed by all the partners. Registrar shall make an entry of the statement in a register and shall file the statement when he will be satisfied that all legal formalities have been completed.
Effects of Non-Registration: In firm is not registered, then the firm and partners will have to be deprived of the following advantages.
(i) The firm cannot file a suit against the third party.
(ii) No partners can file a suit against other partners of the firm.
(iii) The firm cannot file a suit against any partner.
(iv) A partner cannot file a suit to enforce a right rising from the contract or conferred by the partnership Act against the firm.
(v) Third parties can file a suit against the firm to enforce their rights.
Rights not Affected by Non-Registration:
Non-Registration of the firm does not affect the following –
(i)The right of the partner to sue for dissolution of the firm or for accounts of, and his share, the dissolved firm.
(ii) The rights of the firm or its partners having no place of business in India.
(iii) Suits not exceeding Rs. 100
(iv) The power of an official assignee to realise the property of an insolvent partner.
(v) Suits arising otherwise than under a contract, for example, a suit against the third party for infringement of trademarks of the firm.
17. What is Co-operative society? What are its differences between co-operative society and Joint stock company.
Ans: Cooperation is a firm of organisation, where in persons voluntarily associate together as human beings on a basis of equality for the promotion of the economic interests of themselves.
18. Define Joint stock company? Explain its various features
Ans: Literary meaning of the word ‘Company’ is an association of persons formed for common object. A company is a voluntary association of persons recognized by Law, having a distinctive name and common seal, formed to carry on business for profit with capital divisible into transferable shares limited liability a corporate body and perpetual succession
Characteristics of company:
(i) An Artificial person created by Law: A company is a creation of law and is, sometimes called an artificial person. It does not take birth like natural person but comes into existence through law. But a company enjoys all the right of a natural person. It has right to enter into contract and own property. In can sue other and can be sued. But it is an artificial person. So it cannot take oath, cannot be presented in court and it cannot be divorced or married.
(ii) Separate Legal Entity: A company is an artificial person and has a legal entity quite distinct from its members. Being separate legal entity, it bears its own name and acts under a corporate name; it has a seal of its own, it’s assets are separate and distinct from those of its members.
(iii) Common Seal: On incorporation a company becomes legal entity with perpetual succession and a common seal. The common seal of the company is of great importance. It acts as the official signature of the company. As the company has no physical form, it cannot sign its name on a contract. The name of the company must be engraved on the common seal. A document not bearing the common seal of the company is not authentic and has no legal importance.
(iv) Limited Liability: The limited liability is another important feature of the company. If anything goes wrong with the company his risk is only to the extent of the amount of his shares and nothing more. If some amount is uncalled upon a share, he is liable to pay it and not beyond that. The creditors of a company cannot get their claims satisfied beyond the assets of the company. The liability of members of a company limited by guarantee is limited to the amount of guarantee
(v) Transferability of Shares: A shareholder can transfer his shares to any person without the consent of other members. Under Articles of Association, a company can put certain restriction on the transfer of shares but it can not altogether stop it. Private company can put more restrictions on the transferability of shares.
(vi) Limitation of Work: The field of work of a company is fixed its charter. The Memorandum of Association. A company cannot do anything beyond the powers defined is it. Its action is, therefore, limited. In order to do the work beyond the memorandum of association there is a need for its alteration.
(vii) Voluntary Association for Profits: A company is a voluntary association of persons to earns profits. It is formed for the accomplishment of some public good and whatsoever profit is divided among its shareholders. A company cannot be formed to carry on an activity against the public policy and having no profit motive.
(viii) Termination of Existence: A company is created by law, Carries on its affairs according to law and ultimately is affected by law. Generally the existence of a company is terminated by means of winding up.
19. Describe the merit and limitations Joint Stock Company.
Ans: Advantages of a Joint Stock Company:
The advantages of forming a company rather than carrying on partnership business are as follows
(i) Large Capital: The outstanding advantage is that it allows vast mobilisation of capital which otherwise is not possible to arrange. In a public company, there is no limit to the number of members. A very large number of people acquire interest in the company by purchasing shares. The fact that shares are transferable given an added advantage to the company for attracting greater number of people. No other form of business organisation is so well adopted in raising large amounts of capital as the Joint Stock company.
(ii) Vast scope of Expansion: The vast capital collected by means of shares coupled with the earnings of the company contribute sufficient scope for its expansion. The company offers an excellent scope of self generating growth. The managerial talents supported by vast finance leads to huge earnings and to ultimate expansion of the business and growth.
(iii) Limited Liability: The liability of the members of the company is limited members cannot be called upon to pay anything more than the nominal value of the shares held by them. This encourage people who have little to save to invest money in the company, thus providing ample capital for initial outlay and expansion of the business.
(iv) Permanent Existence: The life of the company does not depend on the life of its members. Law creates the company and can dissolve it. The death, insolvency or the transfer of shares of members does not, in any way, affect the existence of the company.
(v) Transferability of shares: The shares in a company are transferable and members can transfer their shares without the consent of other members of the company. The company is listed with the stock Exchange and hence company’s s
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