NCERT Solutions (Part - 1) - Forms of Business Organisation | NCERT Books & Solutions for 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: Under Indian law, a person below 18 years is considered a minor. In a Joint Hindu Family, membership in the family business is by birth, granting a minor equal ownership rights over inherited property, but their liability is limited to their share in the joint property.

In contrast, under the Partnership Act, 1923, a minor cannot be a partner in a partnership firm but may, with consent from all partners, share in the profits. A minor cannot contribute capital or bear losses. Upon turning 18, they can choose to continue in the partnership or withdraw their interest.

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 several exemptions not available to a public company:
(a) Fewer members required: A private company needs only two members for formation, compared to seven for a public company.
(b) Commencement of business: A private company can start operations immediately after receiving its certificate of incorporation, unlike a public company, which also needs a certificate of commencement.
(c) No restrictions on loans to directors: A private company can freely advance loans to directors without government approval, whereas public companies need prior permission.
(d) Fewer directors required: A private company can operate with two directors, while a public company requires at least three.

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 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, the anxiety, burden and stress of the individual partners are shared among all the partners, which reduces the burden on a single partner.