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Multiple Choice Questions
Question 1. The structure in which there is separation of ownership and management is called
(a) Sole proprietorship
(d) All business organisations
Answer: (c) Company
The organisational structure in which there is separation of ownership and management is called a company. In a company, management and ownership lie in the hands of different individuals. A company is owned by its shareholders, while its management is handled by a group of elected persons known as the board of directors. The board of directors in turn appoints the top officials for managing the day-to-day operations of the business.
Hence, the correct answer is option (c).
Question 2. The karta in Joint Hindu family business has
(a) Limited liability
(b) Unlimited liability
(c) No liability for debts
(d) Joint liability
Answer: (b) Unlimited liability
The karta is the eldest male member of a Joint Hindu family who is responsible for decision making in the family business. He needs no permission from the coparceners (joint heirs) before taking any action. Since the karta has complete control over the business, his liability is unlimited. On the other hand, the liability of all coparceners is limited to their share in the family business. Hence, the correct answer is option (b).
Question 3. In a cooperative society the principle followed is
(a) One share one vote
(b) One man one vote
(c) No vote
(d) Multiple votes
Answer: (b) One man one vote
When individuals voluntarily join together to protect and promote their common interests, they form a cooperative society. A cooperative society is managed by an elected body known as the managing committee. The elections in cooperative societies are based on the principle of ‘one man, one vote’. This principle guarantees equal voting rights to the members of a society, thereby preventing any discrimination in the body. Hence, the correct answer is option (b).
Question 4. The board of directors of a joint stock company is elected by
(a) General public
(b) Government bodies
Answer: (c) Shareholders
A joint stock company is owned by individuals known as shareholders. The shareholders elect the board of directors as the chief managing body of the company and grant it indirect control over the business. The board of directors in turn appoints the top officials for managing the business operations. Hence, the correct answer is option (c).
Question 5. Profits do not have to be shared. This statement refers to
(b) Joint Hindu family business
(c) Sole proprietorship
Answer: (c) Sole proprietorship
Profits do not have to be shared in a sole proprietorship form of business. This is because, in a sole proprietorship, the business is owned, managed and controlled by a single individual known as the sole proprietor. Thus, being the sole owner of the business, he or she becomes the single recipient of all the profits of the business. Hence, the correct answer is option (c).
Question 6. The capital of a company is divided into number of parts each one of which are called
Answer: (d) Share
The capital of a company is divided into a number of parts, each one of which is called a share. These parts (or shares) are freely transferable except in the case of a private company. Hence, the correct answer is option (d).
Question 7. The Head of the joint Hindu family business is called
Answer: (c) Karta
The head of a joint Hindu family business is called the karta. The karta is the eldest male member of a joint Hindu family who is responsible for the control and management of the joint Hindu family business and has unlimited liability.
Hence, the correct answer is option (c).
Question 8. Provision of residential accommodation to the members at reasonable rate is the objective of
(a) Producer's cooperative
(b) Consumer's cooperative
(c) Housing cooperative
(d) Credit cooperative
Answer: (c) Housing cooperative
A housing cooperative has the responsibility of ensuring the provision of residential accommodation to the members at a reasonable rate. A housing cooperative aims at providing accommodation to its members by constructing houses and giving them the option of paying the cost in installments.
Hence, the correct answer is option (c).
Question 9. 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
Answer: (d) Secret partner
A secret partner in a firm is a partner whose association with the firm is unknown to the general public. Secret partners do not contribute any capital to the business but have participation rights in the management of the partnership firm. They are also entitled to a share in the profits and losses of the business and have unlimited liabilities. Hence, the correct answer is option (d).
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Short Answer Questions
Question 1. Compare the status of a minor in a Joint Hindu Family Business with that in a partnership firm.
Answer: As per the Indian law, any person below the age of 18 years is considered a ‘minor’. The status of a minor in a Joint Hindu Family differs from that in a partnership firm. In case of a Joint Hindu Family, membership in the family business is by birth. This means that as soon as a boy child is born in a Joint Hindu Family, he is automatically entitled to a share in his family business. In this case, the minor enjoys an equal ownership right over the inherited property as the other members of the family. However, his liability is limited only to the extent of his share in the joint property.
As per the Partnership Act, 1923, no minor can be a partner in a partnership firm. But a partnership firm, with the consent of all the partners, can admit a minor to share the profits of the firm; but he cannot be asked to either contribute capital or bear the losses incurred by the business. A minor is not legally competent to enter into any legal contracts, and therefore, he or she cannot be considered a partner. However, a minor, after attaining the age of 18 years, has the option of either continuing with the partnership firm or withdrawing his interest from it.
Question 2. If registration is optional, why do partnership firms willingly go through this legal formality and get themselves registered? Explain.
Answer: Although registration in case of a partnership firm is optional yet many firms voluntarily opt for it. This is because of the various legal disadvantages associated with non-registration. Some of them are:
→ The partners of a non-registered firm cannot file a suit against a third party; however, non-registration of a partnership firm does not prevent other firms from suing it .
→ The firm cannot file a case against any of its partners. Similarly, a partner of a non-registered firm cannot file a case against his or her co-partners or the firm.
→ A non-registered partnership firm cannot enforce its claims against a third party in a court.
Question 3. State the important privileges available to a private company.
Answer: A private company enjoys certain exemptions or privileges which are often not available to a public company. Some of the privileges enjoyed by a private company are given below.
(a) Lesser number of members required: A private company requires only two members for formation, while a public company requires at least seven members.
(b) Commencement of business: A private company can start its business operations right from the day of receiving the certificate of incorporation. On the other hand, it is mandatory for a public company to obtain a certificate of commencement along with a certificate of incorporation before starting business.
(c) No restriction on advancing loans to the directors: In the case of a private company, there is no restriction on the amount of loans that can be granted to the directors. No prior permissions are required to be sought for advancing such loans. In contrast, a public company has to seek permission from the government before advancing loans to its directors.
(d) Lesser number of directors required for operations: A private company can continue operations with just two directors, whereas a public company must have at least three directors to continue its operations.
Question 4. How does a cooperative society exemplify democracy and secularism? Explain.
Answer: In a cooperative society, management is in the hands of a managing committee elected by the members of the society. The elections in such societies are governed by the principle of ‘one member, one vote’. This implies that all members have equal voting rights irrespective of the amount of capital they have contributed to the society. This principle prevents the dominance of the richer members (who may own a higher number of shares) in the decision-making process. Thus, as in a democracy, a cooperative society treats all its members equally and provides equal rights to its members. Moreover, there is no discrimination among the members on the basis of their religion, caste or sex. In addition, the members are free to elect the members of the managing committee of their choice. Therefore, a cooperative society exemplifies a secularist system.
Question 5: What is meant by 'partner by estoppel'? Explain.
ANSWER: A person can be regarded as a 'partner by estoppel', if he or she through his/her actions or behaviour, leaves an impression on third parties that he or she is a partner in a particular firm. This means that if a person behaves in a manner that makes third parties consider this individual as one of the actual partners, then he or she is regarded as a ‘partner by estoppel’. Such a partner (by estoppel) is actually not a partner, as he or she neither contributes any capital to the firm nor actively participates in the operations of the firm and is not entitled to any share in the firm’s profits or losses. Nevertheless, he or she can be held liable for the debts that the firm owes to third parties. Accordingly, if the funds available to the firm fall short of requirement for the repayment of debts, then the private assets of a partner by estoppel can be used to repay the debts.
Question 6: Explain the following terms in brief
(a) Perpetual succession
(b) Common seal
(d) Artificial person
(a) Perpetual succession: It implies that a company will continue to exist until and unless it is forced by the law to wind up. This implies that a company, as a separate legal entity, cannot come to an end by itself and will continue to operate forever. It will not cease to exist even in situations such as death, retirement or insolvency of any of its members—that is, a company will continue to operate even if all its members die.
(b) Common seal: A company is an artificial entity that is created under the law. Unlike human beings, it cannot sign official documents. This is where the role of a common seal becomes important. A common seal is the official signature of a company that is used by its board of directors in almost all the important official documents. The presence of this seal authenticates the documents, and documents with a common seal can be provided as evidence in a court of law.
(c) Karta: The term karta is used for the head of a joint Hindu family who runs a family business. The karta of a Joint Hindu family is responsible for carrying out the business operations of the family business and exercising full control over the business. He is the eldest member of the family and has unlimited liabilities along with absolute decision-making powers.
(d) Artificial person: By the term artificial person, we mean that a company is created as a separate legal entity under the law and is a juristic person. However, unlike human beings, a company, as an artificial person, cannot breathe or talk, cannot sign its documents and cannot negotiate with its customers. In contrast, like human beings, a company does have its own life that is truly independent of the life of its members. Hence, because of these dissimilarities and similarities, a company is regarded as an artificial person.
Long Answer Questions
Question 1. What do you understand by a sole proprietorship firm? Explain its merits and limitation?
Answer: In a sole proprietorship form of business, the business is owned, managed and controlled by a single individual who is known as the sole proprietor. As the sole owner of the business, the proprietor becomes the single recipient of all the profits earned by the business and, in the same way, has to bear all losses.
Merits of Sole Proprietorship
A sole proprietor enjoys the following benefits.
(a) Ease in formation and closure of business: There are hardly any legal formalities to be fulfilled for setting up a sole proprietorship firm. However, if a proprietor is dealing in drugs and liquor products, then a licence has to be acquired. The procedure for closing down a sole proprietorship firm is also hassle-free and easy.
(b) Quick decision making: A sole proprietor enjoys complete control over the business. This makes decision making quick and easy.
(c) Direct incentive: A sole proprietor is the sole bearer of all types of risks associated with the business and, at the same time, is the single recipient of all the profits and gains earned in the business. Thus, this direct link between efforts and rewards motivates the sole proprietor to operate the business efficiency and effectively.
Limitations of Sole Proprietorship:
The following are a few limitations of a sole proprietor firm.
(a) Limited capital: The financial resources that are available to a sole proprietor are limited merely to this person’s personal savings and borrowings that can be raised from relatives and friends. Thus, the amount of capital available to a sole proprietor is limited, which often prevents him or her from expanding the business.
(b) Limited managerial abilities: A sole proprietor manages all the core functions such as purchasing, selling and planning. As a result, the benefits of specialisation are not available to a sole proprietor. Also, because of limited resources, a sole proprietor may not be able to employ specialised employees to handle specific business operations.
(c) Uncertain life: In the eyes of the law, a sole proprietor and his or her business are regarded as the same entity. In the event of death, insanity, bankruptcy or physical ailment of a sole proprietor, the life of the business is adversely affected.
Question 2. Why is partnership considered by some to be a relatively unpopular form of business ownership? Explain the merits and limitations of partnership.
Answer: Partnership is considered to be a relatively unpopular form of business ownership because of the various limitations associated with it. These limitations include unlimited liability, limited resources, possibility of conflicts and lack of continuity.
Limitations of Partnership
(a) Unlimited liability: In a partnership, all the partners have unlimited liability. This means that if the firm’s assets fall short of the requirement for the repayment of the firm’s debts, then the personal assets of the partners can be used.
(b) Limited resources: A partnership firm faces limited availability of finance, because of the restrictions imposed on the following fronts:
(i) maximum number of partners allowed in a partnership firm by definition
(ii) maximum number of new partners who can be admitted in the firm
Hence, as a result, a partnership firm faces financial constraints, which in turn impedes its growth prospects.
(c) Possibility of conflicts: In a partnership firm, the power of decision making is shared among the partners. This further depends on their respective levels of skills, capabilities and foresightedness. The differences in these qualities may possibly lead to conflicts among the partners.
Merits of Partnership
(a) Easy formation and closure: A partnership firm involves an agreement (either oral or written) between two or more partners. The registration of a partnership firm is not compulsory, which eases its formation. Similarly, a partnership firm can be shut down at any time with the mutual consent of all the partners.
(b) Balanced decision making: In a partnership firm, all the decisions related to the business are taken collectively by all the partners. This makes the decision-making process in a partnership firm comparatively more balanced than in any other form of business ownership.
(c) Sharing of risks: The risks in a partnership firm are shared jointly by all the partners. As a result, anxiety, burden and stress of the individual partners are shared among all the partners, which reduces the burden on a single partner.