Q. 1. “Despite limitations of size and resources, many people continue to prefer sole proprietorship over other forms of organisation.” Explain (KVS 2013, 2015) (DDE)
Ans. Yes, despite limitations of size and resources many people continue to prefer sole proprietorship over other forms of organisation because of following merits of this form of organisation.
(i) Ease of formation and dissolution: It is simple and inexpensive to start a sole trade business. It is not necessary to fulfil any legal formalities like registration,etc. Any person can start this form of organisation by investing a small amount of capital and can dissolve it as per his will.
(ii) Prompt decisions: Under this form of organisation, the sole trader is the sole owner and can take decisions promptly without consulting anybody else.
(iii) Freedom of Choice of business: If due to any reason, there are losses in the business, the sole trader can easily change his business and can start a new one which can help him earn more profits. Thus, he has full freedom regarding the choice of the business.
(iv) Sole recipient of profits: In this form of business organisation, one person has the sole claim on profits and for increasing his profits he works hard and takes interest.
(v) Secrecy: Secrecy is one of the most important factors for the success of every business. In sole proprietorship the owner is in an advantageous position as he can keep his plans secret.
(vi) Flexibility: It is very convenient for the sole proprietor to expand or curtail his business activities in accordance with the changing business environment.
Q. 2. Enumerate any three limitations of sole proprietorship. (NCT 2010)
Define ‘sole proprietorship’. Explain any two demerits of sole proprietorship. (NCT 2008)
What do you understand by a sole proprietorship firm? Explain its merits and limitations.
Explain any three merits and any three limitations of Sole proprietorship. (DDE)
Ans. The word “sole” implies “only” and “proprietor” refers to the “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.
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.
(ii) Confidential and secrecy: 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 the 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 profits.
(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 a sense of accomplishment and confidence in one’s abilities.
Limitations- Sole proprietorship has some limitations, which are as follows -
(i) Limited resources: Resources of a sole proprietor are limited to his/her personal savings and borrowings from others.
(ii) Limited life of a business concern: In the eyes of law, the business and the owner are considered one and the same. Death, insolvency or illness 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 only from the business assets, but also from the personal assets of the proprietor.
(iv) Limited managerial liability: 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.
Q. 3. Define partnership. Explain any two advantages and disadvantages of partnership form of business. (NCT 2010)
Why is partnership considered by some to be a relatively unpopular form of business ownership? Explain the merits and limitations of partnership.
Ans. According to L.H. Haney, “Partnership is the relation between persons competent to make contracts who have agreed to carry on a lawful business in common with a view to private gain”. Partnership is considered by some to be a relatively unpopular form of business ownership, because the partners of a firm have unlimited liability. Personal assets may be used for repaying debts in case the business assets are insufficient.
(i) Ease of formation and closure: A partnership firm can be formed easily by putting an agreement between the partners. 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, consequently decisions are likely to be more balanced.
(iii) More funds: In a partnership, the capital is contributed by a number of partners, so large amount of funds are available as compared to sole proprietorship.
(i) Unlimited liability: Partners are liable to repay debts even from their personal resources in case the business assets are not sufficient to meet the debts, so there is unlimited liability.
(ii) Limited resources: There is a restriction on the number of partners, and hence contribution in terms of capital investment is limited.
(iii) Possibility of conflicts: Partnership is run by a group of persons wherein decision making authority is shared. Difference of opinion on some issues may lead to disputes between partners.
Q. 4. Discuss the types of partners.
Ans. (i) Active partner: A partner who contributes capital and also actively participates in the management and affairs of the business is called an active partner. He shares the profits and losses of the business and his liability is unlimited.
(ii) Sleeping partner: A partner who contributes capital but does not participate in the management and affairs of the business is called a sleeping partner. He shares the profits and losses of the business and has unlimited liability.
(iii) Secret partner: A partner whose association with the firm is not known to the general public is called a secret partner. He also contributes capital, shares profits and losses, participates in the management of the business and has unlimited liability.
(iv) Nominal partner: A partner who allows the partnership firm to use his/her name but does not contribute any capital or take part in the management and affairs of the business. He does not share the profits and losses of the firm but he is liable to the creditors for the repayment of the firm’s debts.
(v) Partner by estoppel: Partner by estoppel is a partner who, through his/her conduct or behaviour, gives an impression that he/she is a partner of a particular firm. Although such a person neither contributes capital nor participates in the management of the business, in the eyes of the third party he is known as a partner of that firm. Hence, he too is liable for the debts of the firms.
(vi) Partner by holding out: A person, who is not actually a partner of a firm but knowingly allows himself/herself to be represented as a partner of the firm is called a partner by holding out. Such a person can be held liable for the repayment of debt extended to the firm due to such representation. In order to avoid this liability, such a person should immediately clarify his position to the third party, stating the fact that he is not a partner. Failure in clarifying same would make him liable to the third party for repayment of any debts taken by the partnership firm.
Q. 5. Explain the factors to be considered while selecting a form of organisation. (NCT 2011)
Why is it important to choose an appropriate form of organisation? Discuss the factors that determine the choice of form of organisation? (NCT)
Ans. It is evident that each form has certain advantages as well as disadvantages. Therefore, it is important to choose an appropriate form of organisation. Factors that determine the choice of form of organisation -
(i) Cost and ease in setting up the organisation: From the point of view of initial cost, sole proprietorship is the preferred form as it involves least expenditure. A company form of organisation, on the other hand, is more complex and involves greater costs.
(ii) Liability: In case of sole proprietorship and partnership firms, the liability of the owners/ partners is unlimited. In Joint Hindu Family Business, only the Karta has unlimited liability. In Co-operative societies and companies, however, liability is limited
(iii) Continuity: In case the business needs a permanent structure, company form is more suitable. For short term ventures, proprietorship or partnership may be preferred.
(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.
(v) Capital consideration: Companies are in a better position to collect large amount of capital by issuing shares to a large number of investors. Partnership firms also have the advantage of combined resources of all partners. But the resources of a sole proprietor are limited.
(vi) Degree of control: If direct control over operations and absolute decision making power is required, sole proprietorship may be preferred.