NCERT Solutions for Class 11 Business Studies Chapter 2 - Forms of Business Organisation

Short Answer Questions:

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

Ans. As per the Indian law, any person below the age of 18 years is considered a ‘minor’. A minor in a Joint Hindu Family Business is a coparcener in the family business. He becomes member in the business by birth therefore, each minor is member of business by default. On the other hand, a minor partner in a partnership business is a implied a partner. A minor partner cannot become a partner of a firm but he/she is entitled to all benefits of a partnership with the mutual consent of all partners.

2. If registration is optional, why do partnership firms willingly go through this legal formality and get themselves registered? Explain.

Ans. Registration of partnership business is optional but if business is not registered then:

(a) it cannot file any legal case against third party or any of the partners
(b) the partners cannot file case against firm or other partners. Thus to gain access to legal course of action in case of conflict, registration is a must.

3. State the important privileges available to a Private company.

Ans. The Privileges available to a private company are as follows:

A private company can be formed with only two members whereas at least seven are needed to form a public company.
A private company must have at least two directors, whereas a public company have minimum three directors.
A private company can make allotment of shares without receiving a minimum number of subscription.
A private company can issue loan to its directors without prior permission of government whereas public company must take permission of government before giving loans to its directors.
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 incorporation before standing business.

4. How does a Cooperative society exemplify democracy and secularism? Explain.

Ans. Cooperative Societies truly symbolise the democratic and secular practices because:

The membership of a cooperative society is voluntary.
They run on the principle of One Man, One Vote.
They permit membership to any person regardless to caste, religion or gender.
A person is free to join a cooperative society as well as to exist the same as per his desire. There can't be any compulsion for him to join or quite a society.

5. What is meant by partner by estoppel? Explain.

Ans. A partner by estoppel is an individual who is not a partner but through his/her behaviour, conducts or initiation lets outsiders believe that he /she is a partner in the business. Such partner is held liable for the debts of the firms because in the eyes of the third party he is considered as partner of the firm.

6. Briefly explain the following terms in brief:

Perpetual succession
Common seal
Karta
Artificial person

Ans.

Perpetual Succession: It is one of the characteristics of a Joint Stock Company which states that a company continues to exist despite the death, bankruptcy, insanity, changes membership or an exit of any of the owners or members from the business. It states that members may come or go but company continues forever. Perpetual Succession is related to Joint Stock Company.
Common Seal: Common Seal is the official signature of a company. It is used by a company as signatures on all official documents. A company is legally bound by all such agreements
Karta: The eldest member of the family who has complete control of the 'Joint Hindu Family business is called KARTA. Term 'Karta' is related to Hindu Undivided Family form organisation.
Artificial Person: Artificial person is other than a natural person (human being) created by law and recognised as a legal entity having distinct identity, legal personality, duties and rights. He has no body, no soul and no conscience. A Joint Stock Company is regarded as an Artificial Person.

Long Answer Questions:

1. What do you understand by a sole proprietorship firm? Explain its merits and limitations?

Ans. Sole proprietorship refers to 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.

Merits of a sole proprietorship:

Quick decision making: Prompt decisions as owner takes all decisions himself there is no need to consult others.
Confidentiality of information: Complete control with owner helps to maintain business secrecy.
Direct incentive: There is no one to share profits, thus all profits are enjoyed by owner only.
Sense of achievement: Successful business gives self-satisfaction and sense of achievement.

Limitations of a sole proprietorship

Limited resources: Business is funded from owner's personal savings or money borrowed from friends, relatives etc.
Limited life of a business concern: Continuity of business depends on owner's personal health or state of mind.
Unlimited liability: Owner's personal assets are at risk in case business fails to pay its liabilities.
Limited managerial ability: Owner's limited capabilities may restrict him to perform all business functions in best possible way. 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.

2. Why is partnership considered by some to be a relatively unpopular form of business ownership? Explain the merits and limitations of partnership.

Ans. Partnerships is considered to be a relatively unpopular form of business ownership because it involves sharing of profits and information, lack of stability and possibility of conflicts due to difference opinion among partners.
Merits of a partnership business:

Ease of formation and closure: Since registration being optional a partnership business be started and closed with consent of all partners. It is easy to form a partnership. No elaborate legal procedures are needed to bring a firm into existence.
Balanced decision-making: Partners undertake responsibilities as per their expertise, balanced and efficient decisions are taken.
Higher capital: Many partners invest capital and there is higher flexibility in the capital because new partners can be agreed to be associated and investing can be increased.
Secrecy: It is easy to maintain business secrecy as there is no need to submit of publish financial results.

Limitations of a partnership business:

Unlimited liability: The proprietor is liable for all the debts of the business. In case assets are insufficient to meet the debts, the personal property of the partners can be affected.
Limited resource: Restricted number of partners limits the availability of finance.
Possibility of conflicts: Too many decision makers create difference of opinion and the cause conflicts.
Lack of continuity: Any conflict between the partners or death of a partner may brim business to an end.
Lack of public confidence: Lack of availability of financial reports makes it difficult outsiders to ascertain the true financial position of business.

3. Why is it important to choose an appropriate form of organisation? Discuss the factors that determine the choice of form of organisation.

Ans. The survival, growth and success of any business depends on the form of business organisation. The selection of the form of business organisation depends on the product line, scale of operations, amount of capital required etc.

Forms Related to Starting a Business:

Cost of Setting Up: The initial cost involved in setting up the organisation is a significant consideration. Sole proprietorships generally have the lowest setup costs, while corporations tend to involve more complex and expensive processes.
Liability: The extent of liability borne by the owners or partners is an important factor. Sole proprietorships and partnerships typically have unlimited liability, meaning the owners' personal assets are at risk. On the other hand, limited liability is a characteristic of companies and certain other forms of organisations, providing protection to the owners' personal assets.
Continuity: The desired continuity of the business is a crucial factor. Sole proprietorships and partnerships are generally more susceptible to disruptions in case of death, retirement, or withdrawal of the owner or partners. Companies, on the other hand, have the advantage of perpetual existence, allowing for smoother continuity.
Management Ability: The management abilities and expertise of the individuals involved are important considerations. Sole proprietors may face limitations in having expertise in all functional areas of management, while partnerships and companies can benefit from the combined skills and knowledge of multiple individuals.
Capital Considerations: The availability and requirements of capital play a significant role. Companies have the advantage of raising large amounts of capital by issuing shares to numerous investors. Partnerships can pool resources from multiple partners. In contrast, sole proprietors may face limitations in accessing sufficient capital.
Degree of Control: The desired level of control over operations and decision-making power is a factor to consider. Sole proprietors have direct control over their businesses and enjoy absolute decision-making power. In partnerships and companies, decision-making may involve more complex processes and shared authority among partners or shareholders.

4. Discuss the characteristics, merits and limitations of cooperative form of organisation. Also describe briefly different types of cooperative societies.

Ans. Cooperative society is an organisation of voluntary people working for a common purpose with an aim to protect economic and social interests of the members.
Formation of a cooperative society:

Minimum of ten people can form a cooperative society.

Cooperative Societies must be registered under the Cooperative Societies Act, 1912.

Capital is raised amongst the members through issue of shares.

Characteristics of Cooperative societies:

Voluntary membership: Any individual above 18 years with common interest is free to join a cooperative society. Members can leave society with a short notice.
Legal status: Cooperatives have separate identity status.
Limited liability: Members have liability limited to the capital contributed.
Service motive: Society is formed with motive of providing mutual help to its members.

Types of cooperative societies

Consumers’ cooperative societies: Societies formed to provide good quality products at reasonable rates, protecting the interest of consumers.
Producers’ cooperative societies: Societies formed to provide good quality and low priced raw materials and other inputs protecting the interest of producers.
Marketing cooperative societies: Societies formed to provide services related to marketing of products by small producers.
Farmer's cooperative societies: Such societies are formed by small farmers who pool their resources to reap the benefits associated with large-scale operation. Societies formed to provide farmers better inputs at reasonable rates to improve productivity.
Credit cooperative societies: Societies established to provide financial assistance to its members at very reasonable terms.
Cooperative housing societies: Societies established to construct houses for its members at reasonable costs.

Merits of a cooperative society:

Equality in voting status: Each member has equal right to vote and elect members of managing committee.
Limited liability: Members have limited liability thus no risk to personal assets.
Continuity: Societies separate from its members allow continuity of operations.
Economy in operations: Very less running cost as members work on voluntary basis.
Support from government: Government provides support to societies in the form of lower taxes, interest rates and subsidies.

Limitations:

Limited resources: Limited finance as capital contribution is the only source of finance.

Inefficiency in management: Individuals run cooperatives on voluntary basis thus may lack expertise.

Lack of secrecy: Difficult to maintain secrecy as members disclose all information relates working of society in the meetings.

Government control: Societies need to follow rules and regulations as stated by government and submit audited financials of the society.

Difference of opinion: Difference of opinion as a result of individual interests may lead to conflicts amongst members.

5. Distinguish between a Joint Hindu Family Business and Partnership.

Basis	Partnership	Hindu Undivided Family
Governing body	It is governed by Indian Partnership Act,1932.	It is governed by Hindu Succession Act,1956.
Number of members	In partnership, there are minimum 2 members and maximum 50 members required.	In Hindu Undivided Family there are minimum 2 members and no limit for maximum members.
Agreement	Express or implied agreement among the partner.	It is created by the operation of Hindu Law and no agreement is needed.
Liability	Liability of all the partners is unlimited.	Except Karta, all other members have limited liability.
Management	Every partner can take active part in management of business.	The management and control of business rests only with the Karta.

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

Ans. Despite the limitations of size and resources may people continue to prefer sole proprietorship over other forms of organisation because of the following reasons:

Quick decision making: Prompt decisions as owner takes all decisions himself there is no need to consult others.
Confidentiality of information: Complete control with owner helps to maintain business secrecy.
Direct incentive: There is no one to share profits, thus all profits are enjoyed by owner only.
Sense of achievement: Successful business gives self-satisfaction and sense of achievement.
Personal relationship with stakeholders: With complete control of business, owner can maintain direct contact with all customers, employees suppliers etc.
Easy formation and closure: No legal formalities or separate law to be followed for formation or closure of business makes it easy to start or end business.