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NCERT Class 11 Business Studies Chapter 2 Forms of Business Organisation
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Forms of Business Organisation
Chapter: 2
| PART – Ⅰ |
| EXERCISES |
Short Answer Questions:
1. Compare the status of a minor in a Joint Hindu family business with that in a partnership firm.
Ans: The inclusion of an individual into the business occurs due to birth in a Hindu Undivided Family. Hence, minors can also be members of the business.However, in a partnership firm, a minor cannot be a full partner by law but may be admitted only to the benefits of partnership.
2. If registration is optional, why do partnership firms willingly go through this legal formality and get themselves registered? Explain.
Ans: It is optional for a partnership firm to get registered. In if a firm does not get registered, it is deprived of many benefits.
The consequences of non-registration of a firm are as follows:
(a) A partner of an unregistered firm cannot file a suit against the firm or other partners.
(b) The firm cannot file a suit against third parties, and.
(c) The firm cannot file a case against the partners.
3. State the important privileges available to a private company.
Ans: The following are some of the privileges of a private limited company as against a public limited company:
(i) A private company can be formed by only two members whereas seven people are needed to form a public company.
(ii) There is no need to issue a prospectus as the public is not invited to subscribe to the shares of a private company.
(iii) Allotment of shares can be done without receiving the minimum subscription.
(iv) A private company needs to have only two directors as against the minimum of three directors in the case of a public company.
(v) A private company is not required to keep an index of members while the same is necessary in the case of a public company.
4. How does a cooperative society exemplify democracy and secularism? Explain.
Ans: The cooperative society exemplifies the idea of democracy and hence finds support from the Government in the form of low taxes, subsidies, and low interest rates on loans. It embodies secularism by welcoming members from all backgrounds, castes, and religions, promoting inclusivity and unity.
5. What is meant by ‘partner by estoppel’? Explain.
Ans: Partner by estoppel: A person is considered a partner by estoppel if, through his/her own initiative, conduct or behaviour, he/she gives an impression to others that he/ she is a partner of the firm. Such partners are held liable for the debts of the firm because in the eyes of the third party they are considered partners, even though they do not contribute capital or take part in its management.
6. Briefly explain the following terms in brief.
(a) Perpetual succession.
Ans: Perpetual succession: A company being a creation of the law, can be brought to an end only by law. It will only cease to exist when a specific procedure for its closure, called winding up, is completed. Members may come and members may go, but the company continues to exist.
(b) Common seal.
Ans: Common seal: The company being an artificial person cannot sign its name by itself. Therefore, every company is required to have its own seal which acts as official signature of the company. Any document which does not carry the common seal of the company is not binding on the company.
(c) Karta.
Ans: The basis of membership in the business is birth in a particular family and three successive generations can be members in the business. The business is controlled by the head of the family who is the eldest member and is called Karta. The control of the family business lies with the Karta. He takes all the decisions and is authorised to manage the business.
(d) Artificial person.
Ans: Artificial person: 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.
Long Answer Questions:
1. What do you understand by a sole proprietorship firm? Explain its merits and limitations?
Ans: Sole proprietorship is a popular form of business organisation and is the most suitable form for small businesses, especially in their initial years of operation. Sole proprietorship refers to a form of business organisation which is owned, managed and controlled by an individual who is the recipient of all profits and bearer of all risks. This is evident from the term itself. The word “sole” implies “only”, and “proprietor” refers to “owner”. Hence, a sole proprietor is the one who is the only owner of a business.
Merits:
Sole proprietorship offers many advantages. Some of the important ones are as follows:
(i) Quick decision making: A sole proprietor enjoys a considerable degree of freedom in making business decisions. Further the decision making is prompt because there is no need to consult others. This may lead to timely capitalisation of market opportunities as and when they arise.
(ii) Confidentiality of information: Sole decision making authority enables the proprietor to keep all the information related to business operations confidential and maintain secrecy. A sole trader is also not bound by law to publish a firm’s accounts.
(iii) Direct incentive: A sole proprietor directly reaps the benefits of his/her efforts as he/she is the sole recipient of all the profit. The need to share profits does not arise as he/she is the single owner. This provides maximum incentive to the sole trader to work hard.
(iv) Sense of accomplishment: There is a personal satisfaction involved in working for oneself. The knowledge that one is responsible for the success of the business not only contributes to self-satisfaction but also instals in the individual a sense of accomplishment and confidence in one’s abilities.
(v) Ease of formation and closure: An important merit of sole proprietorship is the possibility of entering into business with minimal legal formalities. There is no separate law that governs sole proprietorship.
Limitations:
Some of the major limitations of sole proprietorship are as follows:
(i) Limited resources: Resources of a sole proprietor are limited to his/ her personal savings and borrowings from others. Banks and other lending institutions may hesitate to extend a long term loan to a sole proprietor.
(ii) Limited life of a business concern: The sole proprietorship business is owned and controlled by one person, so death, insanity, imprisonment, physical ailment or bankruptcy of a proprietor affects the business and can lead to its closure.
(iii) Unlimited liability: A major disadvantage of sole proprietorship is that the owner has unlimited liability. If the business fails, the creditors can recover their dues not merely from the business assets, but also from the personal assets of the proprietor.
(iv) Limited managerial ability: The owner has to assume the responsibility of varied managerial tasks such as purchasing, selling, financing, etc. It is rare to find an individual who excels in all these areas. Thus decision making may not be balanced in all the cases.
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 to be a relatively unpopular form of business ownership because of the various limitations associated with it.
(i) Unlimited Liability: In most types of partnerships, each partner has unlimited liability, meaning they are personally responsible for the debts of the business.
(ii) Joint liability: Joint liability denotes the obligation of two or more partners to pay back a debt or be responsible for satisfying a liability.
(iii) Limited Access to Capital: Compared to corporations, partnerships may have limited ability to raise funds.
The following points describe the advantages of a partnership firm:
(i) Ease of formation and closure: A partnership firm can be formed easily by putting an agreement between the prospective partners into place whereby they agree to carry out the business of the firm and share risks. There is no compulsion with respect to registration of the firm. Closure of the firm too is an easy task.
(ii) Balanced decision making: The partners can oversee different functions according to their areas of expertise. Because an individual is not forced to handle different activities, this not only reduces the burden of work but also leads to fewer errors in judgments.
(iii) More funds: In a partnership, the capital is contributed by a number of partners. This makes it possible to raise larger amounts of funds as compared to a sole proprietor and undertake additional operations when needed.
(iv) Sharing of risks: The risks involved in running a partnership firm are shared by all the partners. This reduces the anxiety, burden and stress on individual partners.
(v) Secrecy: A partnership firm is not legally required to publish its accounts and submit its reports. Hence it is able to maintain confidentiality of information relating to its operations.
A partnership firm of business organisation suffers from the following limitations:
(i) Unlimited liability: Partners are liable to repay debts even from their personal resources in case the business assets are not sufficient to meet its debts. The liability of partners is both joint and several which may prove to be a drawback for those partners who have greater personal wealth.
(ii) Limited resources: There is a restriction on the number of partners, and hence contribution in terms of capital investment is usually not sufficient to support large scale business operations.
(iii) Possibility of conflicts: Partnership is run by a group of persons wherein decision making authority is shared. Difference in opinion on some issues may lead to disputes between partners. Further, decisions of one partner are binding on other partners.
(iv) Lack of continuity: Partnership comes to an end with the death, retirement, insolvency or lunacy of any partner. It may result in lack of continuity. However, the remaining partners can enter into a fresh agreement and continue to run the business.
(v) Lack of public confidence: A partnership firm is not legally required to publish its financial reports or make other related information public.
3. Why is it important to choose an appropriate form of organisation? Discuss the factors that determine the choice of form of organisation.
Ans: Choosing an appropriate form of organisation is essential because it directly affects the business’s structure, legal liabilities, tax obligations, and operational flexibility. Each form, whether sole proprietorship, partnership, or corporation, comes with different levels of personal liability, ease of raising capital, management control, and regulatory requirements. Selection of an appropriate form of organisation can be made after taking various factors into consideration. Initial costs, liability, continuity, capital considerations, managerial ability, degree of control and nature of business are the key factors that need to be taken into account while deciding about the suitable form of organisation for one’s business.
The factors that determine the choice of form of organisation are:
(i) Cost and ease in setting up the organisation: As far as initial business setting-up costs are concerned, sole proprietorship is the most inexpensive way of starting a business. However, the legal requirements are minimum and the scale of operations is small. In case of partnership also, the advantage of less legal formalities and lower cost is there because of limited scale of operations.
(ii) Liability: In case of sole proprietorship and partnership firms, the liability of the owners/partners is unlimited. This may call for paying the debt from personal assets of the owners. In joint Hindu family business, only the Karta has unlimited liability. In cooperative societies and companies, however, liability is limited and creditors can force payment of their claims only to the extent of the company’s assets.
(iii) Continuity: The continuity of sole proprietorship and partnership firms are affected by such events as death, insolvency or insanity of the owners. However, such factors do not affect the continuity of business in the case of organisations like joint Hindu family business, cooperative societies and companies.
(iv) Management ability: A sole proprietor may find it difficult to have expertise in all functional areas of management. In other forms of organisations like partnership and company, there is no such problem. Division of work among the members in such organisations allows the managers to specialise in specific areas, leading to better decision making.
(v) Capital considerations: Companies are in a better position to collect large amounts of capital by issuing shares to a large number of investors.
(vi) Degree of control: If direct control over operations and absolute decision making power is required, proprietorship may be preferred. But if the owners do not mind sharing control and decision making, partnership or company form of organisation can be adopted.
(vii) Nature of business: If direct personal contact is needed with the customers such as in the case of a grocery store, proprietorship may be more suitable. For large manufacturing units, however, when direct personal contact with the customer is not required, the company form of organisation may be adopted.
4. Discuss the characteristics, merits and limitations of cooperative form of organisation. Also briefly describe different types of cooperative societies.
Ans: The characteristics of a cooperative society are listed below:
(i) Voluntary membership: The membership of a cooperative society is voluntary. A person is free to join a cooperative society, and can also leave anytime as per his desire. There cannot be any compulsion for him to join or quit a society.
(ii) Legal status: Registration of a cooperative society is compulsory. This accords a separate identity to the society which is distinct from its members. The society can enter into contracts and hold property in its name, sue and be sued by others.
(iii) Limited liability: The liability of the members of a cooperative society is limited to the extent of the amount contributed by them as capital. This defines the maximum risk that a member can be asked to bear.
(iv) Control: In a cooperative society, the power to take decisions lies in the hands of an elected managing committee. The right to vote gives the members a chance to choose the members who will constitute the managing committee and this lends the cooperative society a democratic character.
(v) Service motive: The cooperative society through its purpose lays emphasis on the values of mutual help and welfare. Hence, the motive of service dominates its working.
The cooperative society offers many benefits to its members. Some of the advantages of the cooperative form of organisation are as follows.
(i) Equality in voting status: The principle of ‘one man one vote’ governs the cooperative society. Irrespective of the amount of capital contribution by a member, each member is entitled to equal voting rights.
(ii) Limited liability: The liability of members of a cooperative society is limited to the extent of their capital contribution. The personal assets of the members are, therefore, safe from being used to repay business debts.
(iii) Stable existence: Death, bankruptcy or insanity of the members do not affect continuity of a cooperative society. A society, therefore, operates unaffected by any change in the membership.
(iv) Economy in operations: The members generally offer honorary services to the society. As the focus is on elimination of middlemen, this helps in reducing costs. The customers or producers themselves are members of the society, and hence the risk of bad debts is lower.
(v) Support from government: The cooperative society exemplifies the idea of democracy and hence finds support from the Government in the form of low taxes, subsidies, and low interest rates on loans.
(vi) Ease of formation: The cooperative society can be started with a minimum of ten members. The registration procedure is simple involving a few legal formalities. Its formation is governed by the provisions of Cooperative Societies Act 1912.
The cooperative form of organisation suffers from the following limitations:
(i) Limited resources: Resources a cooperative society consists of capital contributions of the members with limited means. The low rate of dividend offered on investment also acts as a deterrent in attracting membership or more capital from the members.
(ii) Inefficiency in management: Cooperative societies are unable to attract and employ expert managers because of their inability to pay them high salaries. The members who offer honorary services on a voluntary basis are generally not professionally equipped to handle the management functions effectively.
(iii) Lack of secrecy: As a result of open discussions in the meetings of members as well as disclosure obligations as per the Societies Act (7), it is difficult to maintain secrecy about the operations of a cooperative society.
(iv) Government control: In return for the privileges offered by the government, cooperative societies have to comply with several rules and regulations related to auditing of accounts, submission of accounts, etc. Interference in the functioning of the cooperative organisation through the control exercised by the state cooperative departments also negatively affects its freedom of operation.
(v) Differences of opinion: Internal quarrels arising as a result of contrary viewpoints may lead to difficulties in decision making. Personal interests may start to dominate the welfare motive and the benefit of other members may take a backseat if personal gain is given preference by certain members.
Types of Cooperative Societies:
Various types of cooperative societies based on the nature of their operations are described below:
(i) Consumers cooperative societies: The consumer cooperative societies are formed to protect the interests of consumers. The members are consumers desirous of obtaining good quality products at reasonable prices. The society aims at eliminating middlemen to achieve economy in operations.
(ii) Producers cooperative societies: These societies are set up to protect the interest of small producers. The members are producers desirous of procuring inputs for production of goods to meet the demands of consumers.
(iii) Marketing cooperative societies: Such societies are established to help small producers in selling their products. The members consist of producers who wish to obtain reasonable prices for their output.
(iv) Farmers cooperative societies: These societies are established to protect the interests of farmers by providing better inputs at a reasonable cost. The members comprise farmers who wish to jointly take up farming activities.
(v) Credit cooperative societies: Credit cooperative societies are established for providing easy credit on reasonable terms to the members. The members comprise of persons who seek financial help in the form of loans.
(vi) Cooperative housing societies: Cooperative housing societies are established to help people with limited income to construct houses at reasonable costs. The members of these societies consist of people who are desirous of procuring residential accommodation at lower costs.
5. Distinguish between a Joint Hindu family business and partnership.
Ans:
| Joint Hindu family | Partnership |
| It is one of the oldest forms of business organisation in the country. It refers to a form of organisation wherein the business is owned and carried on by the members of the Hindu Undivided Family (HUF). | The Indian Partnership Act, 1932 defines partnership as “the relation between persons who have agreed to share the profit of the business carried on by all or any one of them acting for all. |
| The business is controlled by the head of the family who is the eldest member and is called Karta. All members have equal ownership rights over the property of an ancestor and they are known as coparceners. | The partnership form of business organisation is governed by the Indian Partnership Act, 1932. |
| The liability of all members except the Karta is limited to their share of coparcenary property of the business. The Karta, however, has unlimited liability. | The partners of a firm have unlimited liability. Personal assets may be used for repaying debts in case the business assets are insufficient. Further, the partners are jointly and individually liable for payment of debts. |
| The Karta has absolute decision making power. This avoids conflicts among members as no one can interfere with his right to decide. This also leads to prompt and flexible decision making. | The partners share amongst themselves the responsibility of decision making and control of day to day activities. Decisions are generally taken with mutual consent. |
| The business continues even after the death of the Karta as the next eldest member takes up the position of Karta, leaving the business stable. The business can, however, be terminated with the mutual consent of the members. | Partnership is characterised by lack of continuity of business since the death, retirement, insolvency or insanity of any partner can bring an end to the business. |
6. Despite limitations of size and resources, many people continue to prefer sole proprietorship over other forms of organisation? Why?
Ans: Sole proprietorship is a popular form of business organisation and is the most suitable form for small businesses, especially in their initial years of operation. Sole proprietorship refers to a form of business organisation which is owned, managed and controlled by an individual who is the recipient of all profits and bearer of all risks. This is evident from the term itself. The word “sole” implies “only”, and “proprietor” refers to “owner”. Hence, a sole proprietor is the one who is the only owner of a business. This form of business is particularly common in areas of personalised services such as beauty parlours, hair salons and small scale activities like running a retail shop in a locality.
Salient characteristics of the sole proprietorship form of organisation are as follows:
(i) Formation and closure: There is no separate law that governs sole proprietorship. Hardly any legal formalities are required to start a sole proprietary business, though in some cases one may require a licence. Closure of the business can also be done easily.
(ii) Liability: Sole proprietors have unlimited liability. This implies that the owner is personally responsible for payment of debts in case the assets of the business are not sufficient to meet all the debts. As such the owner’s personal possessions such as his/her personal car and other assets could be sold for repaying the debt.
(iii) Sole risk bearer and profit recipient: The risk of failure of business is borne all alone by the sole proprietor. However, if the business is successful, the proprietor enjoys all the benefits.
(iv) Control: The right to run the business and make all decisions lies absolutely with the sole proprietor. He can carry out his plans without any interference from others.
(v) No separate entity: In the eyes of the law, no distinction is made between the sole trader and his business, as the business does not have an identity separate from the owner.
(vi) Lack of business continuity: The sale proprietorship business is owned and controlled by one person, therefore death, insanity, imprisonment, physical ailment or bankruptcy of the sole proprietor will have a direct and detrimental effect on the business and may even cause closure of the business.
