Short Answer Type Questions
Q. 1. What do you understand by sole proprietorship firm? Explain its demerits.
Ans. Sole proprietorship firm is a 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. Demerits of sole-proprietorship are.
(i) Unlimited liability: If due to some reasons there are losses in business, his personal property can be utilised to pay the business debts. This discourages him to expand his business.
(ii) Limited managerial capacity: It is difficult for a sole proprietor to excel in all areas of business like purchasing, marketing etc. Further due to limited resources he can’t hire professionally qualified staff.
(iii) Limited life of a business concern: Death, illness, insolvency of a sole-proprietor affects the business and can lead to its closure.
Q. 2. Identify the merits or limitations of sole proprietorship hidden in the quoted lines:
(i) “The sole proprietor can easily change the size of the business.”
(ii) “All the profits of the business belong to the sole proprietor.”
(iii) “Inability of the owner to manage all the activities of business himself.
Ans. Merits of Sole Proprietorship -
(i) Ease of formation and dissolution: The sole proprietorship is the simplest form of business ownership. There is hardly any formality involved in setting up this type of organisation. This ownership organisation is not governed by any special Act.
(ii) Sole claim on profits: The sole trader is the only person to whom the profits belong. This always acts as a stimulant to personal incentive. Limitations of Sole Proprietorship:
(iii) Limitations of management: She/He must rely upon his/her own skills and judgement in managing the business. Few proprietors have all of the management skills required for financing, marketing, purchasing, supervising personnel, and related functions. Not only does this limit the size of the business, but it also contributes to the relatively high rate of failure among sole proprietorships.
Q. 3. ‘One man control is the best in the world if that man is big enough to manage everything’. Explain the statement.
Ans. It is right to say that one man control is the best in the world if that man is big enough to manage everything, because of the following reasons –
(i) Easy to form and dissolve: A sole proprietorship organisation is easy to form. The sole proprietor can close the business whenever he desires without any legal formality. It can be closed by paying back its debts.
(ii) Motivation: In a sole proprietorship firm, there is a direct relation between the efforts and rewards, which means if a proprietor puts extra efforts, then his profit increases and the proprietor gets extra income.
(iii) Flexibility: In a sole proprietorship firm, all decisions are taken by the proprietor himself. So there is flexibility.
(iv) Sole beneficiary of profits: All the profits earned by the sole proprietorship firm belong solely to the proprietor.
(v) Personal touch: In a sole proprietorship firm, generally all the work is carried out by the proprietor himself.
(vi) Secrecy: The sole proprietor is not expected to share his secrets with others.
Q. 4. “Sole Proprietorship business has limited life of business”. Comment on this.
Ans. In the eyes of law, the proprietorship 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. Therefore, sole proprietorship business has limited life of business.
Q. 5. When is it appropriate to select sole proprietorship form of rganisation?
Ans. Sole proprietorship is most suitable for the business which requires -
(i) less amount of capital to establish.
(ii) which are carried out on a small scale.
(iii) where customers demand personalised services.
Q. 6. A sole proprietor is less inclined to take risks in the form of innovation or expansion. Why?
Ans. A sole proprietor is less inclined to take risks in the form of innovation or expansion because if his decision goes wrong or unfavourable, it can create a serious financial burden on the owner or loss to the business. As the sole proprietor has unlimited liability; his personal property can be used to cover up such losses.
Q. 7. Identify and explain the features of sole proprietorship shown in following statement sentences:
(i) He can carry out his plans without any interference from others.
(ii) He receives all the business profits which become a direct reward for his risk bearing.
Ans. (i) The feature indicated here is ‘Control’. The right to run the business and make all the decisions lies absolutely with the sole proprietor.He need not take consent of anyone else while taking decisions. He solely controls his business.
(ii) The feature shown in the sentence is ‘Sole risk bearer and the profit recipient. As the sole proprietor is the only owner of the business, therefore the risk of failure of business or profit earned by successfully running the business are enjoyed by him all alone.
Q. 8. Describe
(ii) Secret partner
(iii) Nominal partner
(iv) Active partner
Ans. (i) Sleeping Partner: A partner who contributes capital in the firm but does not take active part in the management of the business is known as sleeping partners. However, he has the same duties, rights, liability (unlimited) and status as enjoyed by active partners.
(ii) Secret Partner: A partner who apparently does not appear to be a partner but secretly manages the affairs of the business and has interest in it, is called is a secret partner. He also has unlimited liability.
(iii) Nominal Partner: If a person neither contributes capital nor shares profits, does not participate in the management of a firm but allows his credit and name to be used by the firm is known as nominal partner.
(iv) Active Partner: A partner who actively participates in the day-to-day conduct of the firm’s business is known as active or actual partners. Such a partner acts as an agent of the firm and bears an unlimited liability.
Q. 9. Briefly explain the following types of partners:
(i) Dormant Partner
(ii) Active Partner
(iii) Nominal Partner
Ans. (i) Dormant Partner: A partner who does not participate in the active business of a company or partnership, but is entitled to a share of the profits, and subject to a share in losses. This partner is also called sleeping partner or silent partner.
(ii) 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.
(iii) 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.
Q. 10. According to India Partnership Act 1932, it is not compulsory for a partnership firm to get itself registered, then why do partners prefer to get the firm registered?
OR
“Registration of a partnership firm is not compulsory but beneficial.” Do you agree? Give three reasons in support of your answer.
OR
If registration is optional, why do partnership firms willingly go through this formality and get themselves registered? State any three reasons.
Ans. Legally it is not compulsory for a partnership firm to get itself registered. Nevertheless, partners prefer to get the firm registered to overcome the following limitations -
(i) The partner of an unregistered firm cannot file a suit against any other partner to settle the disputes.
(ii) The partner of an unregistered firm cannot file a suit against the partnership firm.
(iii) The partner of an unregistered firm cannot file a suit against an outsider or third party for recovery of any claim.
(iv) Outsiders can file a suit on an unregistered firm for claim.
Q. 11. Define partnership. State its any three important features.
Ans. Partnership means association of two or more persons who can pool in required resources like capital, knowledge, expertise, skill, etc. in such a way, that together they can form a cohesive team leading their business towards achievement of their common goals successfully. Features of partnership -
(i) Liability: Partners are jointly as well as individually liable for payment of debts and this liability is unlimited. When assets of the business are not sufficient to pay for its liabilities in full, personal assets of the partners can be used for making the payment.
(ii) Risk bearing: The risk involved in running the business is jointly borne by the partners. Both profits and losses are shared by them in the preagreed ratio.
(iii) Membership: Minimum two members are required to start a partnership business, while the maximum number of partners is 50 as per Rule 10 of the companies
Q. 12. Explain the meaning of “partner by holding out”.
Ans. 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 known as partner by holding out. Such a partner 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/she is not a partner. Failure in clarifying the same would make him liable to the third party for repayment of any debts taken by the partnership firm. Such a partner does not contribute any capital. Such a partner does not take part in the management and its decisions.
Q. 13. What are the different kinds of partnerships?
Ans. Partnership can be classified on the basis of -
(i) Duration
(ii) Liability Classification on the basis of duration:
(i) Partnership at will: The existence of this partnership depends on the will of the partners. The business of the firm continues as long as the partners desire and is terminated when any partner gives a notice for dissolution of the firm.
(ii) Particular partnership: It is the partnership which is formed for completing only a particular project or any activity to be carried on for a specified period of time only. This partnership is automatically dissolved on completion of the project or activity.
Classification on the basis of liability -
(i) General partnership: The partnership in which the liability of the partners in unlimited is called general partnership. In this type of partnership, partners have the right to take part in the management of the firm. Each partner as well as the firm is bound by the acts of all the partners. It is optional for the firm to get itself registered. Death, insolvency, retirement or lunacy of any partner adversely affects the existence of the firm
(ii) Limited partnership: Limited partnership is the partnership in which the liability of at least one member is unlimited while others have limited liability. The members with limited liability neither have the rights to participate in the management of the business nor are their acts binding on other partners or the firm. It is compulsory to register such partnership.
Q. 14. Explain ‘Mutual Agency’ feature of partnership.
Ans. Mutual agency implies that every partner is both an agent and principal. He is an agent of other partners as he represents them and thereby binds them through his decisions and acts. He is a principal as he too can be bound by the acts of other partners.
Q. 15. Nazia and Shazia are partners in a firm providing counselling services. For improving the interiors of their office they required bank loan. Razia, Nazia’s friend requested a bank manager to grant loan to Nazia’s firm, actively participating in the negotiation process for the deal. The bank extended credit to the firm for the stipulated period.
(i) State the liability of Razia.+
(ii) Identify the values promoted by partnership form of organisation.
Ans. (i) Razia will be liable for repayment of such debt as if she is a partner of the firm, if Nazia’s firm is not able to repay.
(ii) Values promoted by partnership form of organisation are mutual understanding, co-operation and team spirit, risk sharing, optimum utilisation of resources for productive relationship among the partners.
Q. 16. Distinguish between a Secret partner and Nominal partner.
Ans. (i) Meaning: A secret partner is one whose association with the firm is unknown to the general public, whereas a nominal partner is one who allows the use his name by a firm.
(ii) Capital contribution: A secret partner contributes capital but a nominal partner does not contribute capital of into the firm.
(iii) Participation in management: A secret partner participates in management but secretly on the other hand a nominal partner does not participate in management.
(iv) Sharing of profits/losses: A secret partner shares profits and losses whereas a nominal partner does not share.
Q. 17. Why is partnership regarded as a viable option for overcoming the disadvantages of financing and managing an expanding business under sole proprietorship?
Ans. Partnership serves a better form of business organisation over sole proprietorship providing a solution for the limited financial resources and management skills required for expanding business because -
(i) Number of members will be large contributing larger amount of funds to undertake additional operations.
(ii) Balanced decision making by the partners of varied managerial skills will not only reduce the burden of work but also leads to fewer errors in judgements.
Q. 18. Write the features of Joint Hindu Family Business.
Ans. (i) Formation: At least two members and ancestral property to be inherited by them is the basic requirement. An individual becomes a member by birth; therefore, no agreement is required.
(ii) Liability: The liability of Karta is unlimited while that of the other members is limited to the extent of their share.
(iii) Control: Karta has full control over the family business. All business decisions are taken by him only and are binding on the other members.
Q. 19. State the advantages of Joint Hindu Family Business.
Ans. (i) Effective control: The decision making power lies only with the Karta and no other member has the right to interfere in his decision. Thus, the Karta can take prompt and flexible decisions that ensure effective control in the organisation.
(ii) Continued business existence: The operation of the business is not threatened by the death, insanity or imprisonment of the Karta because in the eventuality of any mis-happening with the Karta, the next eldest member takes up his position.
(iii) Limited liability of members: Except the Karta, the liability of other members is limited to the extent of their share in the business.
(iv) Increased loyalty and co-operation: In a Joint Hindu Family Business, chances of great coordination among the members are more because they all belong to the same family. Hence, chances of loyalty towards business are more as compared to other forms of organisations.
Q. 20. Mention the limitations of Joint Hindu Family Business.
Ans. (i) Limited resources: The main source of capital under this kind of business is the ancestral property. Therefore, the business suffers from the problem of limited capital
(ii) Unlimited liability of Karta: The liability of the Karta is unlimited. In case of loss, the personal property of the Karta can be used for making payment to the creditors.
(iii) Dominance of Karta: The entire control and management of the business lies with the Karta. Sometimes, the members may not agree with the decisions taken by the Karta. This may create conflict among them and consequently operations of the business breaks down.
(iv) Limited managerial skills: No man on this earth is perfect. In the case of Joint Hindu Family Business, the head of the family holds the position of Karta by virtue of the Hindu Succession Act, 1956. Hence, it is not possible for the Karta to be an expert in all areas of management.
Q. 21. What is meant by Co-operative Organization? Explain any two types of Co-operative Organization.
Ans. Co-operative Organisation is a society which has its objectives for the promotion of economic interest of its members in accordance with co-operative principles’. In other words, a society is a voluntary association of persons who join together with the motive of welfare of the members. Two types of co-operative organizations are -
(i) Farmers’ Co-operative Societies: These societies are formed to protect the interests of the farmers. The members are those farmers who want to carry on farming activities jointly. The basic purpose of forming these societies is to obtain benefits of large scale farming thereby increasing the productivity. These societies provide better quality seeds, fertilisers, manures and other equipment for use in the cultivation of crops. These societies help the farmers in solving the problems of doing farming on fragmented holdings.
(ii) Co-operative Housing Societies: These societies are formed to help their members to construct houses at reasonable costs. These societies either construct flats or provide plots to the members at reasonable rates. The members are allowed to pay for the same in easy instalments.
Q. 22. Explain any four advantages of consumer cooperative societies.
OR
Explain any three merits of a co-operative society.
Ans. The advantages of consumer co-operative societies are as follows -+
(i) Equality in voting right: A co-operative society is governed by the principle of ‘one man one vote’. Each member has equal voting right irrespective of his capital contribution in the society.
(ii) Ease of formation: Minimum ten members are required to form a co-operative society. The procedure for the registration of the society is very simple and involves a few legal formalities.
(iii) Limited liability: The members have limited liability to the extent of the capital contributed by them. Therefore, they cannot be held personally liable for the payment of debts.
(iv) Support from government: The government provides subsidy to these societies and charges a very low rate of interest on loans given to them. The rate of taxes is also very low.
Q. 23. Comment on the following features of cooperative society:
(i) Legal status,
(ii) Control.
Ans. (i) Legal Status: It is compulsory for a co-operative society to get registered under Co-operative Societies Act 1912. This accords a separate identity to the society which is distinct from its members. As a result of being a separate legal entity it is not affected by the entry and exit of its members.
(ii) Control: In a co-operative society, the power to take decisions lies in the hands of an elected managing committee. Through the right to vote every member is given a chance to participate in the management and all the decisions taken by the management committee on the basis of majority.
Q. 24. “The motive of service dominates the working of co-operative society”. How?
Ans. The co-operative societies lays emphasis on the values of mutual help and welfare. If any surplus is generated as a result of its operations, it is distributed amongst the members as dividend in conformity with the bye-laws of the society. Therefore it can be said that co-operative societies i.e., aim is to earn some profit for the benefit of its members.
Q. 25. Rashmi wants to setup a co-operative society which can protect the farmers in rural areas from the exploitation of money lenders who change high rates of interest on loans. Through this, she will also promote saving habits in them.
(i) Identify the type of co-operative society she will form?
(ii) What are the functions of such co-operative society?
(iii) Which two values are communicated to society by setting up such societies?
Ans. (i) Rashmi will form credit co-operative society.
(ii) The functions of such co-operative society is to provide loans to members out of the amounts collected as capital and to collect deposits from the members.
(iii) Values communicated are:
(i) Mutual help,
(ii) Promotion of saving habits,
(iii) Increasing rate on capital formation,
(iv) Protection of farmers from the money lenders.
Q. 26. Explain briefly the aim and functions of Consumer Co-operative Society.
Ans. The Consumer Co-operative Society’s aim is to eliminate middlemen to achieve economy in operations. It purchases goods in bulk directly from the wholesalers and sells goods to the members, thereby eliminating the middlemen.
Long Answer Type Questions
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)
OR
Define ‘sole proprietorship’. Explain any two demerits of sole proprietorship. (NCT 2008)
OR
What do you understand by a sole proprietorship firm? Explain its merits and limitations.
OR
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)
OR
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.
Merits:
(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.
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 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)
OR
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.
