NCERT Textbook - Forms of Business Organisation Commerce Notes | EduRev

Business Studies (BST) Class 11

Commerce : NCERT Textbook - Forms of Business Organisation Commerce Notes | EduRev

 Page 1


CHAPTER 2
FORMS OF BUSINESS
ORGANISATION
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
• identify different forms of business organisation;
• explain features, merits and limitations of different forms of
business organisations;
• distinguish between various forms of organisations; and
• discuss the factors determining choice of an appropriate form of
business organisation.
2019-20
Page 2


CHAPTER 2
FORMS OF BUSINESS
ORGANISATION
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
• identify different forms of business organisation;
• explain features, merits and limitations of different forms of
business organisations;
• distinguish between various forms of organisations; and
• discuss the factors determining choice of an appropriate form of
business organisation.
2019-20
28 BUSINESS STUDIES
2.1 INTRODUCTION
If one is planning to start a business or
is interested in expanding an existing
one, an important decision relates to
the choice of the form of organisation.
The most appropriate form is
determined by weighing the
advantages and disadvantages of each
type of organisation against one’s own
requirements.
Various forms of business
organisations from which one can
choose the right one include:
(a) Sole proprietorship,
(b) Joint Hindu family business,
(c) Partnership,
(d) Cooperative societies, and
(e) Joint stock company.
Let us start our discussion with
sole proprietorship — the simplest form
of business organisation, and then
move on to analysing more complex
forms of organisations.
2.2 SOLE PROPRIETORSHIP
Do you often go in the evenings to buy
registers, pens, chart papers, etc., from
a small neighbourhood stationery
store? Well, in all probability in the
course of your transactions, you have
interacted with a sole proprietor.
Sole proprietorship is a popular
form of business organisation and is
Neha, a bright final year student was waiting for her results to be declared.
While at home she decided to put her free time to use. Having an aptitude for
painting, she tried her hand at decorating clay pots and bowls with designs.
She was excited at the praise showered on her by her friends and
acquaintances on her work. She even managed to sell a few pieces of unique
hand pottery from her home to people living in and around her colony.
Operating from home, she was able to save on rental payments. She gained a
lot of popularity by word of mouth publicity as a sole proprietor. She further
perfected her skills of painting pottery and created new motifs and designs.
All this generated great interest among her customers and provided a boost
to the demand for her products. By the end of summer, she found that she
had been able to make a profit of Rs. 2500 from her paltry investment in
colours, pottery and drawing sheets. She felt motivated to take up this work
as a career. She has, therefore, decided to set up her own artwork business.
She can continue running the business on her own as a sole proprietor, but
she needs more money for doing business on a larger scale. Her father has
suggested that she should form a partnership with her cousin to meet the
need for additional funds and for sharing the responsibilities and risks. Side
by side, he is of the opinion that it is possible that the business might grow
further and may require the formation of a company. She is in a fix as to what
form of business organisation she should go in for?
2019-20
Page 3


CHAPTER 2
FORMS OF BUSINESS
ORGANISATION
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
• identify different forms of business organisation;
• explain features, merits and limitations of different forms of
business organisations;
• distinguish between various forms of organisations; and
• discuss the factors determining choice of an appropriate form of
business organisation.
2019-20
28 BUSINESS STUDIES
2.1 INTRODUCTION
If one is planning to start a business or
is interested in expanding an existing
one, an important decision relates to
the choice of the form of organisation.
The most appropriate form is
determined by weighing the
advantages and disadvantages of each
type of organisation against one’s own
requirements.
Various forms of business
organisations from which one can
choose the right one include:
(a) Sole proprietorship,
(b) Joint Hindu family business,
(c) Partnership,
(d) Cooperative societies, and
(e) Joint stock company.
Let us start our discussion with
sole proprietorship — the simplest form
of business organisation, and then
move on to analysing more complex
forms of organisations.
2.2 SOLE PROPRIETORSHIP
Do you often go in the evenings to buy
registers, pens, chart papers, etc., from
a small neighbourhood stationery
store? Well, in all probability in the
course of your transactions, you have
interacted with a sole proprietor.
Sole proprietorship is a popular
form of business organisation and is
Neha, a bright final year student was waiting for her results to be declared.
While at home she decided to put her free time to use. Having an aptitude for
painting, she tried her hand at decorating clay pots and bowls with designs.
She was excited at the praise showered on her by her friends and
acquaintances on her work. She even managed to sell a few pieces of unique
hand pottery from her home to people living in and around her colony.
Operating from home, she was able to save on rental payments. She gained a
lot of popularity by word of mouth publicity as a sole proprietor. She further
perfected her skills of painting pottery and created new motifs and designs.
All this generated great interest among her customers and provided a boost
to the demand for her products. By the end of summer, she found that she
had been able to make a profit of Rs. 2500 from her paltry investment in
colours, pottery and drawing sheets. She felt motivated to take up this work
as a career. She has, therefore, decided to set up her own artwork business.
She can continue running the business on her own as a sole proprietor, but
she needs more money for doing business on a larger scale. Her father has
suggested that she should form a partnership with her cousin to meet the
need for additional funds and for sharing the responsibilities and risks. Side
by side, he is of the opinion that it is possible that the business might grow
further and may require the formation of a company. She is in a fix as to what
form of business organisation she should go in for?
2019-20
29 FORMS OF BUSINESS ORGANISATION
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
saloons and small scale activities like
running a retail shop in a locality.
formation as well as closure of
business.
(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. Suppose the
total outside liabilities of XYZ dry
cleaner, a sole proprietorship firm, are
Rs. 80,000 at the time of dissolution,
but its assets are Rs. 60,000 only. In
such a situation the proprietor will have
to bring in Rs. 20,000 from her
personal sources even if she has to sell
Features
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 license.
Closure of the business can also be
done easily. Thus, there is ease in
her personal property to repay the
firm’s debts.
(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. He receives all the business
profits which become a direct reward
for his risk bearing.
(iv) Control: The right to run the
business and make all decisions lies
Sole trader is a type of business unit where a person is solely responsible for
providing the capital, for bearing the risk of the enterprise and for the
management of business.
J.L. Hansen
The individual proprietorship is the form of business organisation at the head
of which stands an individual as one who is responsible, who directs its
operations and who alone runs the risk of failure.
L.H. Haney
2019-20
Page 4


CHAPTER 2
FORMS OF BUSINESS
ORGANISATION
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
• identify different forms of business organisation;
• explain features, merits and limitations of different forms of
business organisations;
• distinguish between various forms of organisations; and
• discuss the factors determining choice of an appropriate form of
business organisation.
2019-20
28 BUSINESS STUDIES
2.1 INTRODUCTION
If one is planning to start a business or
is interested in expanding an existing
one, an important decision relates to
the choice of the form of organisation.
The most appropriate form is
determined by weighing the
advantages and disadvantages of each
type of organisation against one’s own
requirements.
Various forms of business
organisations from which one can
choose the right one include:
(a) Sole proprietorship,
(b) Joint Hindu family business,
(c) Partnership,
(d) Cooperative societies, and
(e) Joint stock company.
Let us start our discussion with
sole proprietorship — the simplest form
of business organisation, and then
move on to analysing more complex
forms of organisations.
2.2 SOLE PROPRIETORSHIP
Do you often go in the evenings to buy
registers, pens, chart papers, etc., from
a small neighbourhood stationery
store? Well, in all probability in the
course of your transactions, you have
interacted with a sole proprietor.
Sole proprietorship is a popular
form of business organisation and is
Neha, a bright final year student was waiting for her results to be declared.
While at home she decided to put her free time to use. Having an aptitude for
painting, she tried her hand at decorating clay pots and bowls with designs.
She was excited at the praise showered on her by her friends and
acquaintances on her work. She even managed to sell a few pieces of unique
hand pottery from her home to people living in and around her colony.
Operating from home, she was able to save on rental payments. She gained a
lot of popularity by word of mouth publicity as a sole proprietor. She further
perfected her skills of painting pottery and created new motifs and designs.
All this generated great interest among her customers and provided a boost
to the demand for her products. By the end of summer, she found that she
had been able to make a profit of Rs. 2500 from her paltry investment in
colours, pottery and drawing sheets. She felt motivated to take up this work
as a career. She has, therefore, decided to set up her own artwork business.
She can continue running the business on her own as a sole proprietor, but
she needs more money for doing business on a larger scale. Her father has
suggested that she should form a partnership with her cousin to meet the
need for additional funds and for sharing the responsibilities and risks. Side
by side, he is of the opinion that it is possible that the business might grow
further and may require the formation of a company. She is in a fix as to what
form of business organisation she should go in for?
2019-20
29 FORMS OF BUSINESS ORGANISATION
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
saloons and small scale activities like
running a retail shop in a locality.
formation as well as closure of
business.
(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. Suppose the
total outside liabilities of XYZ dry
cleaner, a sole proprietorship firm, are
Rs. 80,000 at the time of dissolution,
but its assets are Rs. 60,000 only. In
such a situation the proprietor will have
to bring in Rs. 20,000 from her
personal sources even if she has to sell
Features
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 license.
Closure of the business can also be
done easily. Thus, there is ease in
her personal property to repay the
firm’s debts.
(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. He receives all the business
profits which become a direct reward
for his risk bearing.
(iv) Control: The right to run the
business and make all decisions lies
Sole trader is a type of business unit where a person is solely responsible for
providing the capital, for bearing the risk of the enterprise and for the
management of business.
J.L. Hansen
The individual proprietorship is the form of business organisation at the head
of which stands an individual as one who is responsible, who directs its
operations and who alone runs the risk of failure.
L.H. Haney
2019-20
30 BUSINESS STUDIES
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
business does not have an identity
separate from the owner. The owner is,
therefore, held responsible for all the
activities of the business.
(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.
Merits
Sole proprietorship offers many
advantages. Some of the important ones
are as follows:
(i) Quick decision making: A sole
proprietor enjoys 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
A Refreshing Start: Coca Cola Owes its Origin to a Sole Proprietor!
The product that has given the world its best-known taste was born in Atlanta,
Georgia, on May 8, 1886. Dr. John Stith Pemberton, a local pharmacist, produced
the syrup for Coca-Cola
®
, and carried a jug of the new product down the street
to Jacobs’ Pharmacy, where it was sampled, pronounced “excellent” and placed
on sale for five cents a glass as a soda fountain drink. Dr. Pemberton never
realised the potential of the beverage he created. He gradually sold portions of
his business to various partners and, just prior to his death in 1888, sold his
remaining interest in Coca-Cola to Asa G. Candler. An Atlantan with great
business acumen, Mr. Candler proceeded to buy additional business rights
and acquire complete control.
On May 1, 1889, Asa Candler published a full-page advertisement in The
Atlanta Journal, proclaiming his wholesale and retail drug business as “sole
proprietors of Coca-Cola ... Delicious. Refreshing. Exhilarating.
Invigorating.” Sole ownership, which Mr. Candler did not actually achieve
until 1891, needed an investment of $ 2,300.
It was only in 1892 that Mr. Candler formed a company called The Coca-Cola
Corporation.
Source: Website of Coca Cola company.
2019-20
Page 5


CHAPTER 2
FORMS OF BUSINESS
ORGANISATION
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
• identify different forms of business organisation;
• explain features, merits and limitations of different forms of
business organisations;
• distinguish between various forms of organisations; and
• discuss the factors determining choice of an appropriate form of
business organisation.
2019-20
28 BUSINESS STUDIES
2.1 INTRODUCTION
If one is planning to start a business or
is interested in expanding an existing
one, an important decision relates to
the choice of the form of organisation.
The most appropriate form is
determined by weighing the
advantages and disadvantages of each
type of organisation against one’s own
requirements.
Various forms of business
organisations from which one can
choose the right one include:
(a) Sole proprietorship,
(b) Joint Hindu family business,
(c) Partnership,
(d) Cooperative societies, and
(e) Joint stock company.
Let us start our discussion with
sole proprietorship — the simplest form
of business organisation, and then
move on to analysing more complex
forms of organisations.
2.2 SOLE PROPRIETORSHIP
Do you often go in the evenings to buy
registers, pens, chart papers, etc., from
a small neighbourhood stationery
store? Well, in all probability in the
course of your transactions, you have
interacted with a sole proprietor.
Sole proprietorship is a popular
form of business organisation and is
Neha, a bright final year student was waiting for her results to be declared.
While at home she decided to put her free time to use. Having an aptitude for
painting, she tried her hand at decorating clay pots and bowls with designs.
She was excited at the praise showered on her by her friends and
acquaintances on her work. She even managed to sell a few pieces of unique
hand pottery from her home to people living in and around her colony.
Operating from home, she was able to save on rental payments. She gained a
lot of popularity by word of mouth publicity as a sole proprietor. She further
perfected her skills of painting pottery and created new motifs and designs.
All this generated great interest among her customers and provided a boost
to the demand for her products. By the end of summer, she found that she
had been able to make a profit of Rs. 2500 from her paltry investment in
colours, pottery and drawing sheets. She felt motivated to take up this work
as a career. She has, therefore, decided to set up her own artwork business.
She can continue running the business on her own as a sole proprietor, but
she needs more money for doing business on a larger scale. Her father has
suggested that she should form a partnership with her cousin to meet the
need for additional funds and for sharing the responsibilities and risks. Side
by side, he is of the opinion that it is possible that the business might grow
further and may require the formation of a company. She is in a fix as to what
form of business organisation she should go in for?
2019-20
29 FORMS OF BUSINESS ORGANISATION
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
saloons and small scale activities like
running a retail shop in a locality.
formation as well as closure of
business.
(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. Suppose the
total outside liabilities of XYZ dry
cleaner, a sole proprietorship firm, are
Rs. 80,000 at the time of dissolution,
but its assets are Rs. 60,000 only. In
such a situation the proprietor will have
to bring in Rs. 20,000 from her
personal sources even if she has to sell
Features
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 license.
Closure of the business can also be
done easily. Thus, there is ease in
her personal property to repay the
firm’s debts.
(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. He receives all the business
profits which become a direct reward
for his risk bearing.
(iv) Control: The right to run the
business and make all decisions lies
Sole trader is a type of business unit where a person is solely responsible for
providing the capital, for bearing the risk of the enterprise and for the
management of business.
J.L. Hansen
The individual proprietorship is the form of business organisation at the head
of which stands an individual as one who is responsible, who directs its
operations and who alone runs the risk of failure.
L.H. Haney
2019-20
30 BUSINESS STUDIES
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
business does not have an identity
separate from the owner. The owner is,
therefore, held responsible for all the
activities of the business.
(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.
Merits
Sole proprietorship offers many
advantages. Some of the important ones
are as follows:
(i) Quick decision making: A sole
proprietor enjoys 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
A Refreshing Start: Coca Cola Owes its Origin to a Sole Proprietor!
The product that has given the world its best-known taste was born in Atlanta,
Georgia, on May 8, 1886. Dr. John Stith Pemberton, a local pharmacist, produced
the syrup for Coca-Cola
®
, and carried a jug of the new product down the street
to Jacobs’ Pharmacy, where it was sampled, pronounced “excellent” and placed
on sale for five cents a glass as a soda fountain drink. Dr. Pemberton never
realised the potential of the beverage he created. He gradually sold portions of
his business to various partners and, just prior to his death in 1888, sold his
remaining interest in Coca-Cola to Asa G. Candler. An Atlantan with great
business acumen, Mr. Candler proceeded to buy additional business rights
and acquire complete control.
On May 1, 1889, Asa Candler published a full-page advertisement in The
Atlanta Journal, proclaiming his wholesale and retail drug business as “sole
proprietors of Coca-Cola ... Delicious. Refreshing. Exhilarating.
Invigorating.” Sole ownership, which Mr. Candler did not actually achieve
until 1891, needed an investment of $ 2,300.
It was only in 1892 that Mr. Candler formed a company called The Coca-Cola
Corporation.
Source: Website of Coca Cola company.
2019-20
31 FORMS OF BUSINESS ORGANISATION
secrecy. A sole trader is also not bound
by law to publish 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 instils 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. As
sole proprietorship is the least
regulated form of business, it is easy
to start and close the business as per
the wish of the owner.
Limitations
Notwithstanding various advantages,
the sole proprietorship form of
organisation is not free from
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.
Lack of resources is one of the major
reasons why the size of the business
rarely grows much and generally
remains small.
(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. A
poor decision or an unfavourable
circumstance can create serious
financial burden on the owner. That is
why a sole proprietor is less inclined to
take risks in the form of innovation
or expansion.
(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.
Also, due to limited resources, sole
proprietor may not be able to employ
and retain talented and ambitious
employees.
Though sole proprietorship suffers
from various shortcomings, many
2019-20
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