Forms of Business Organisation NCERT Solutions | Business Studies (BST) Class 11 - Commerce PDF Download

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 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 the 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 the 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) Smaller 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 a 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) Smaller 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 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 the 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
(c) Karta
(d) Artificial person
Answer: 
(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 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 efficiently 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) the maximum number of partners allowed in a partnership firm by definition
(ii) the maximum number of new partners who can be admitted to 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.

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, the need for funds, the risk involved, the 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 the 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 specialization of managerial abilities: If the business operations are large and require specialized 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 a cooperative form of organisation. Also, describe briefly different types of cooperative societies.

Answer: The word ‘cooperative’ means an organization 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, of 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 for a society under the Cooperative Societies Act, of 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 the 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 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 their 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, labeling, 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 more advanced inputs at low rates to farmers.
(e) Credit cooperative societies- These societies ensure the availability of funds to their 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 for its members by constructing houses for them. These societies provide their members with easy repayment schemes through which the cost of the houses can be repaid in the form of installments.

Question 5. Distinguish between a Joint Hindu family business and a partnership.

Answer: 

Question 6. Despite limitations of size and resources, many people continue to prefer sole proprietorship over other forms of organization. Why?

Answer: Despite the limitations in terms of size and resources, many people prefer sole proprietorship over any other form 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 acquire a license. 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 efficiently 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.

Application Questions

Question 1: In which form of organization is a trade agreement made by one owner binding on the others? Give reasons to support your answer.

Answer: It is under a 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 principal as well as an agent. As an agent, he binds others through his actions and as a principal he is bound by the action of others.

Question 2: The business assets of an organization 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 organization is a sole proprietorship firm
(b) The organization is a partnership firm with Anthony and Akbar as 
partners. Which of the two partners can the creditors approach for repayment of the debt? Explain giving reasons

Answer:

(a) In the 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 organization?
(d) What legal formalities will she have to undergo to operate the business as a company?

Answer:

(a) The following are two of the benefits of a sole proprietorship.

1. A sole proprietor is the single recipient of all the profits of the business.
2. 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.

1. In a joint stock company, capital can be easily expanded by issuing fresh, new shares.
2. 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.

1. Promotion of the company
2. Submitting documents such as Memorandum of Association, Articles of Association, statutory declarations and agreement
3. Getting the certificate of incorporation
4. Getting the certificate of commencement of business

Frequently Asked Questions

Question 1: Compare the status of a minor in a Joint Hindu Family Business with that in a partnership firm.

Answer: A minor becomes a member of the Joint Hindu Family Business by virtue of his birth. On the other hand, in partnership, a minor can be a partner only in profits.

Question 2: How does a cooperative society exemplify democracy and secularism? Explain.

Answer: Cooperative is a form of organization wherein persons voluntarily associate together as human beings on the basis of equality for the promotion of an economic interest for themselves. In a cooperative society, the power to take decisions lies in the hands of an elected managing committee. The right to vote gives the members a chance to choose the members who will constitute the managing committee and this lends the cooperative society a democratic character. Also, the principle of ‘one man, one vote’ governs the cooperative society, irrespective of the amount of capital contribution by a member, each member is entitled to equal voting rights. Membership in a cooperative society is voluntary. A person is free to join a cooperative society, and can also leave anytime as per his desire. Membership is open to all, irrespective of religion, caste, and gender. Thus, by keeping all these points in mind, a cooperative society exemplifies democracy and secularism.

Question 3: If registration is optional, why do partnership firms willingly go through the legal formality of getting themselves registered? Explain.

Answer: Registration for a partnership firm is not necessary. However, firms still voluntarily apply for registration. This is because it is definite proof of the firm's existence, and if a firm does not get itself registered, then it can lose out on many benefits. In addition, some serious consequences it can face because of non-registration are:

1. Inability to file a suit by the partner of an unregistered firm against another firm.
2. Inability to file a suit against a third party for the recovery of claims. However, suits can be filed against a non-registered firm by a registered firm for their claims.
3. Inability to file a suit against any of its co-partners.