Page No. 57:
Question 3. Why is it important to choose an appropriate form of organisation? Discuss the factors that determine the choice of form of organisation.
Answer: The choice of an appropriate form of business organisation is important for the following reasons.
(a) Options to choose among various business forms: As there exist numerous forms of business organisations such as sole proprietorship, partnership, cooperative society and company, the choice of an appropriate business organisation is important, because each business form has its own merits and demerits.
(b) Business factors: Every type of business form is influenced by its respective business-related factors, namely, need of funds, risk involved, amount of profits and legal obligations. Therefore, the choice of the appropriate business form is made only after the evaluation of all these business factors.
(c) Long-term growth prospects: The growth prospects of each type of business form are different. If a businessperson opts for a particular business form without correctly evaluating the growth prospects, then the business may fail or the long-term growth prospects of the business will suffer.
Factors determining Choice of a Business Form
The following are the factors that determine the choice of a business organisation.
(a) Nature of business activity: Any individual first needs to decide upon the nature or kind of business activity that he or she desires to undertake. In case the business type requires direct personal contact with customers, then the sole proprietorship form of business proves beneficial. On the other hand, if direct personal contact is not required, then a partnership or a company form of business is more suitable.
(b) Degree of control: The choice of a business form also depends on the degree of control that a businessperson wants to exercise over its management. If a businessperson aims to have direct control over all the business operations, then sole proprietorship may be considered appropriate. However, if he or she does not mind sharing the decision-making powers with others, then a partnership or company form of business would be more suitable.
(c) Degree and specialisation of managerial abilities: If the business operations are large and require specialised and skilled professionals for managing them, then a company form of business may be selected. However, if the business operations are not very complex and the scale of operations is also not very large, then sole proprietorship proves to be a better alternative.
Question 4. Discuss the characteristics, merits and limitations of cooperative form of organisation. Also describe briefly different types of cooperative societies.
Answer: The word ‘cooperative’ means an organisation in which the stakeholders work with one another. Thus, a cooperative society is a voluntary association of individuals who join together to protect or promote their common interests.
Features of Cooperative Societies
(a) Separate legal entity: The registration of a cooperative society is compulsory under the Cooperative Societies Act, 1912. Once the registration is complete, the cooperative society is granted the status of a separate legal entity. This implies that the cooperative society can hold properties in its own name and enter into contracts. Moreover, it can sue others and can be sued by others.
(b) Management and control: A cooperative society is a democratic form of organisation as it is managed and controlled by a managing committee which is elected by the members of the society on the principle of ‘one member, one vote’.
Merits of Cooperative Societies
(a) Ease of formation: The formation of a cooperative society is quite easy as it requires the induction of only 10 adult members. The registration procedure of a society under the Cooperative Societies Act, 1912, is quite simple.
(b) Continued existence: A cooperative society is a stable form of organisation as it enjoys the status of a separate legal entity that is considered distinct from its members. As a result, the life of a cooperative society remains unaffected by the death, insolvency or insanity of its members.
Limitations of Cooperative Societies
(a) Excessive government control: Cooperative societies have to follow certain rules and regulations as imposed on them by the cooperative departments of the state government concerned. These rules include submission and auditing of accounts.
(b) Inefficiency in management: The management of a cooperative society generally comprises part-time or inexperienced people. They may not be well equipped with the skills required to handle the managerial functions effectively. Consequently, cooperative societies often lack efficiency.
Types of Cooperative Societies
Cooperative societies are classified into the following six types.
(a) Consumer cooperative societies: These are formed to provide consumer goods at reasonable prices to its members.
(b) Producer cooperative societies: The objective of producer cooperative societies is to procure raw materials and other inputs at low costs and supply them to small producers.
(c) Marketing cooperative societies: These societies pool the outputs of the member and perform certain marketing functions for them such as transportation, labelling, packaging and warehousing.
(d) Farmers’ cooperative societies: Such societies are formed by small farmers who pool their resources to reap the benefits associated with large-scale operations. These societies ensure the availability of better and advanced inputs at low rates to farmers.
(e) Credit cooperative societies- These societies ensure the availability of funds to its members at comparatively low interest rates on reasonable terms.
(f) Cooperative housing societies: The aim of housing cooperative societies is to solve the problem of finding residential accommodation of its members by constructing houses for them. These societies provide its members with easy repayment schemes through which the cost of the houses can be repaid in form of installments.
Question 5. Distinguish between a Joint Hindu family business and partnership.
Question 6. Despite limitations of size and resources, many people continue to prefer sole proprietorship over other forms of organisation? Why?
Answer: Despite the limitations in terms of size and resources, many people prefer sole proprietorship over any other forms of business primarily because of the numerous benefits associated with the sole proprietorship business form.
The following are a few important benefits that a businessperson enjoys by being a sole proprietor.
(a) Ease in formation and closure: There are hardly any legal formalities that are required to be fulfilled for setting up a sole proprietorship firm. However, if a proprietor wants to deal in drugs and liquor, then he or she must to acquire a licence. Just as setting up a sole proprietorship firm is easy, its closure is also hassle-free.
(b) Quick decision making: A sole proprietor enjoys complete control over the business, facilitating quick and easy decision making.
(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 from the business. Thus, it is due to this direct link between the businessperson’s efforts and the rewards which keeps this individual motivated to operate the business efficiency and effectively.
(d) Flexibility in operations: A sole proprietorship firm is highly flexible in operations. It can adapt itself to various situations, and vital changes can be incorporated, as per the dynamism of the business environment. The reason for the high degree of flexibility can be attributed to the fact that a sole proprietor is the only person who is involved in every aspect of the business.
Question 1: In which form of organisation is a trade agreement made by one owner binding on the others? Give reasons to support your answer.
ANSWER: It is under partnership that the trade agreement made by one owner becomes binding for others. This is because every partner acts for each other. In other words, every partner is both a principle as well as an agent. As an agent he binds others through his actions and as a principle he is bind by the action of others.
Question 2: The business assets of an organisation amount to Rs. 50,000 but the debts that remain unpaid are Rs. 80,000. What course of action can the creditors take if
(a) The organisation is a sole proprietorship firm
(b) The organisation is a partnership firm with Anthony and Akbar as
partners. Which of the two partners can the creditors approach for repayment of debt? Explain giving reasons
(a) In case of a sole proprietorship the creditors can claim the personal property of the proprietor. This is because the proprietor has unlimited liability.
(b) The creditors can approach either Akbar or Anthony. Both of them would have the liability to pay according to their profit sharing ratio. Moreover, in case one of them becomes insolvent the creditors can approach the other partner.
Question 3: Kiran is a sole proprietor. Over the past decade, her business has grown from operating a neighbourhood corner shop selling accessories such as artificial jewellery, bags, hair clips and nail art to a retail chain with three branches in the city. Although she looks after the varied functions in all the branches, she is wondering whether she should form a company to better manage the business. She also has plans to open branches countrywide.
(a) Explain two benefits of remaining a sole proprietor
(b) Explain two benefits of converting to a joint stock company
(c) What role will her decision to go nationwide play in her choice of form of the organisation?
(d) What legal formalities will she have to undergo to operate business as a company?
(a) The following are two of the benefits of sole proprietorship.
i. A sole proprietor is the single recipient of all the profits of the business.
ii. A sole proprietor takes all business decisions independently and enjoys complete control over the business.
(b) The following are two benefits of converting to a joint stock company.
i. In a joint stock company capital can be easily expanded by issuing fresh, new shares.
ii. The liability of the owners is limited to the amount of capital invested by them.
(c) If she plans to go nationwide then converting to a joint stock company would be more appropriate as it will lead to large scale business operations.
(d) Some of the legal formalities to be completed for operating a joint stock company are as follows.
i. Promotion of the company
ii. Submitting documents such as Memorandum of Association, Articles of Association, statutory declaration and agreement
iii. Getting the certificate of incorporation
iv. Getting the certificate of commencement of business