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

National Council of Educational Research and Training (NCERT) Book Solutions for class 11th
Subject: Business Studies
Chapter: Chapter 2 – Forms of Business Organisation

These Class 11th NCERT Solutions for Business Studies provide detailed, step-by-step solutions to all questions in an Business Studies NCERT textbook.

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Class 11th Business Studies Chapter 2 – Forms of Business Organisation NCERT Solution is given below.

Multiple Choice Questions

1. The structure in which there is separation of ownership and management is called

(a) Sole proprietorship
(b) Partnership
(c) Company
(d) A business organisations

Answer (c) The management and control of the affairs of the company is undertaken by the Board of Directors, which appoints the top management officials to the business. The managers are accountable to shareholders who are the owners of the company

2. The karta in Joint Hindu family business has

(a) limited liability
(b) unlimited liability
(c) no liability for debts
(d) joint liability

Answer (b) The joint Hindu family business is controlled by the head of the family who IS the eldest member and is called Karta. The kerte has unlimited liability while the liability of all other members is limited to their share of co-parcenery property of the business.

3. In a co-operative society. the principle followed is

(a) one share one vote
(b) one man one vote
(c) no vote
(d) multiple votes

Answer (b) The pnncipte of one man one vote governs the co-operative society Each member is entitled to equal voting rights uresoecuve of the amount of capital contnbuuon by hlm/her

4. The board of directors of a joint stock company is elected by

(a) General public
(b) Government bodies
(c) Shareholders
(d) Employees

Answer (c) The shareholders are tne owners of the company while the Board of Directors is the chief managing body elected by the shareholders

5. The maximum number of partners allowed in the banking business are

(a) Twenty
(b) Ten
(c) No limit
(d) Two

Answer (b) The Minimum number of partners needed to start a partnership firm is two while the maximum number is ten In case of ban!(ing Industry and twenty In case of other businesses.

6. Profits do not have to be shared. This statement refers to

(a) Partnership
(b) Joint Hindu family business
(c) Sole proprietorship
(d) Company

Answer (c) Sale propnetorstup refers to a form of organisation where business is owned, managed and controlled by a single Individual who bears all the risks and is the only recipient of all the profits.

7. The capital of a company is divided into number of parts each one of which are called

(a) Dividend
(b) Profit
(c) Interest
(d) Share

Answer (d) The capita. of the company IS divided into srn Ill’ parts called ‘shares’ which can be transferred freely from one sharehotdor to another person (except In a private company). The shareholders are thus the owners of the company.

8. The Head of the Joint Hindu family business is called

(a) Proprietor
(b) Director
(c) Katta
(d) Manager

Answer (c) The loint Hindu family business is controlled by me head of the family who is the oldest member and is called Karta.

9. Provision of residential accommodation to the members at reasonable rates is the objective of

(a) producer’s co-operative
(b) consumer’s co-operative
(c) housing co-operative
(d) credit co-operative

Answer (c) Co-operative housing societies are established to help people with limited income to construct houses at reasonable costs and giving the option of paying in instalments.

10. A partner whose association with the firm is unknown to the general public is called

(a) Active partner
(b) Sleeping partner
(c) Nominal partner
(d) Secret partner

Answer (d) A secret partner is one whose association with the firm is unknown to the general public. He is like the rest of the partners in all other aspects

Short Answer Type Questions

Question 1. For which of the following types of business do you think a sole proprietorship form of organisation would be more suitable and why?

(a) Grocery store
(b) Medical store
(c) Legal consultancy
(d) Craft centre
(e) Internet cafe
(f) Chartered accountancy firm

Answer

Sale proprietorship will be most suitable in case of a Grocery store as in this case, initial business setting-up costs are not very high, the legal requirements are minimum and the scale 01operations is small.

Besides, direct personal contact is needed with the customers in the case of a grocery store and hence, sole proprietorship where there is a single person who owns and manages the business may be more suitable as he would be able to know his customers well and thus serve them better.

Question 2. For which of the following types of business do you think a partnership form of organisation would be more suitable and why?

(a) Grocery store
(b) Medical store
(c) Legal consultancy
(d) Craft centre
(e) Internet cafe
(f) Chartered accountancy firm

Answer

Partnership form of organisation would be most suitable for all Internet cafe as this business needs greater capital Investment and varied skills It can come into existence easily through a legal agreement by putting an agreement between the prospective partners into place whereb, they agree to carryout the business of the firm and share risks There is no compulsion with respect to registrallon of the firm In case of lack of demand closure of the firm too is not difficult Further the partners are jOintly and individually liable for payment of debts which does not put the liability on one person as in sole proprietorship.

Question 3. Explain the following terms in brief

(a) Perpetual succession
(b) Common seal
(c) Karta
(d) Artificial person

Answer

(a) Perpetual Succession Company is a legal entity separate of its owners or members It can be brought to an end only by law as it is created by the law. It will only cease to exist when a specific procedure for lis closure. ca led winding up, is completed. Members may come and go. but Ihe company continues to exist through consecutive succession of old members by new members on a continuous basis We can say that perpetual succession’ Implies permanent existence which is not affected by death, retirement insolvency of members.

(b) Common Seal A company is a creation of law and exists Independent of its members Company is thus considered to be an artificial person who acts through its Board of Directors, When the Board of Directors enters into an agreement with others. It indicates the company’s approvallhrough a common seal The common seal is the engraved equivalent of an official signature Any agreement which does not have the company seal put on it is not legally binding on the company.

(c) Karta The head of the Hindu Joint family who is the eldest member and controls the Joint Hindu family business which IS a specific form of business organisation found only in India is called Karta Joint Hindu family busmess refers to a form of organisation wherein the business is owned and carried on by the members of the Hindu Undivided Family (HUF) It is governed by the Hindu Law The control of the family business lies with the karta He lakes all the decisions and is authorised to manage the business His oecisions are binding on the other members. The karta has unlimited liability while the liability of all other members is limited to their share of co-parcenenry property of the business.

(d) Artificial Person A company is called an artificial person because just like natural persons, a company can own’ property, incur debts, borrow money, enter into contracts, sue and be sued but unlike them it cannot breathe, talk, walk, eat, etc. A company is a creation of law and exists as an artificial person independent of its members.

Question 4. Compare the status of a minor in a Joint Hindu Family Business with that in a partnership firm.

Answer

When the inclusion of an individual into the business occur due to the birth in the Hindu Undivided Family (HUF) is known as Minor. On the other hand partnership is based on legal contract between two persons who agree to share the profits or losses of a business carried on by them and a minor is incompetent to enter into such a valid contract with others.

Hence, a minor cannot become a partner In any firm. However, a minor can be admitted to the benefits of a partnership firm with the mutual consent of all other partners.

Question 5. If registration is optional, why do partnership firms willingly go through this legal formality and get themselves registered? Explain.

Answer

Registration of partnership firm means recording of the firm’s name and its relevant prescribed particulars, in the Register of firms kept with the Registrar of firms. It provides conclusive proof of the existence of a partnership firm. It is optional for a partnership firm to get registered still most of the partnership firms voluntarily get themselves registered as in case of non-registration, the firm has to face the follOwing consequences

  1. A.partner of an unregistered firm cannot file file suit against the firm or other partners
  2. The firm cannot fHea suit against third parties
  3. The firm cannot file a case against the partners.

Hence, to avoid these disadvantages, partnership firms register themselves.

Question 6. State the important privileges available to a private company.

Answer

The following are some of the privileges of a private limited company compared to a public limited company

  1. The minimum number of members required to form a private company is only two while at least seven people are needed to form a public company.
  2. A private company does not need to issue a prospectus as public is not Invited to subscribe to its shares.
  3. Allotment of shares can be done without receiving the minimum subscription.
  4. A private company can start business as soon as it receives the certificate of incorporation and does not have to wait for the receipt of certificate of commencement as in case of a public company.
  5. A private company needs to have only two directors as against the minimum of three directors in the case of a public company.
  6. A private company is not required to keep an index of members unlike a public company.
  7. There is no restriction on the amount of-loans to directors in a private company while in case of a public company permission from the government is required.

Question 7. How does a co-operative society exemplify democracy and secularism? Explain.

Answer

The word co-operative means working together with others tor a common purpose. The co-operative society is a voluntary association of persons, who join together with the motive of welfare of the members.

The membership of a co-operative society is voluntary. A person is free to join a co-operative society and can also leave anytime without any compulsion. The decision making power in a co-operative society lies in the hands of an elected managing committee. Every member has one vote and this right to vote gives the members a chance to elect the members of the managing committee. All these features lend the co-operative society a
democratic character Further, the membership of a co-operative society is open to all. Irrespective of their religion caste and gender. The co- perative society through its purpose lays emphasis on the values of mutual help and welfare. These features prove the secular nature of co-operative societies.

Question 8. What is meant by ‘partner by estoppel’? Explain.

Answer

A partner by estoppel is a person who gives an impression to others that he/she is a partner of the firm through his/her own initiative, conduct or behaviour. Such partners are held liable for the debts of the firm because in the eyes of others, they are considered partners. even though they do not contribute capital or take part in its management e.g., Mr Sharma is a friend of Mr Mathur who is a partner in a pharmaceutical firm-Health First. On Mr Mathur’s request, Mr Sharma accompanies him to a business meeting with Wellness Pharmaceuticals and actively participates in the process of negotiallon for a business deal anc gives the impression that he is also a partner in Health First. If credit is extended to Health First on the basis of these negotiations. Mr Sharma would also be liable for repayment of such debt, as il he is acting as the partner of the firm.

Long Answer Type Questions

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

Answer

Sole proprietorship refers to a 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. The word “sole” implies “only” and “proprietor” refers .to “owner”.

Hence, a sole proprietor is the only owner of a business. This form of business is particularly common in small scale business and areas of personalised services.

Features of Sole Proprietorship

  1. Formation and Closure Very few legal formalities are required to start a sole proprietary business, except in the fields where a license is required. Closure of the business can also be done easily.
  2. Unlimited Uabllity S?le proprietors have. unlimited liability. This implies that the owner ISpersonally responsible for payment of debts in case the assets of the business are not sufficient to meet all the debts.
  3. Sole Risk Bearer an.dProfit Recipient The sole proprietor bears the risk of failure of business all alone and also receives all the business profits which are a reward for his risk bearing.
  4. Control and Decision Making The sole proprietor has the absolute right to run the business and make all decisions regarding the business without any interference from others He is the king in all aspects.
  5. No Separate Entity. No distinction is made. between the sole proprietor and his business In terms of law as business does not have an identity separate from the owner. The owner is, therefore, held responsible for all the activities of the business.
  6. Lack of Business Continuity Sole proprietorship lacks continuity as death. insanity. imprisonment, physical ailment or bankruptcy of the sole proprietor will have a negative effect on the business and may even cause closure of the business.

Merits of Sole Proprietorship

(i) Prompt Decision Making

The decision making is prompt under sole proprietorship. a.sthere is considerable degree of freedom in making business decisions and there is no need to consult others. This results in timely capitalisation of market opportunities.

(ii) Confidentiality

All the information related to business operations is kept confidential and secrecy is maintained as the sole decision making authority restswith the proprietor. A sole proprietor is also no bound legally to publish firm’s accounts.

(iii) Direct Incentive

The sole proprietor receives al the business proftts as a reward for bearing the business risk He/she is the single owner and does not need to share profit. This provides an Incentive to the sole proprietor to work hard

(iv) Sense of Accomplishment There is a sense of personal satisfaction involved In working for oneself. It insu s a sense of accomphshment and confidence in the individual.

(v) Ease of Formation and Closure An Important merit of sole proprietorship s the possibility of entering into business with minima legal formalities. There is no separate law that govens sole proprietorship. As sole proprietorship is the least regulated form of business, it is easy to start and close the business as per the wish of the owner Limitations of Sale Proprietorship

(i) Limited Resources

Resources of a sale proprietor are limited to his/her personal savings and borrowings from others Banks and other financial Institutions hesitate to provide long term loan to a sole proprietor and hence, the size of the bus ness generally remains small

(ii) Limited Life of a Business Concern Death, Insolvency or illness of a proprietor has a detrimental effects on the business and can lead to its closure

(iii) Unlimited Uability

A major disadvantage of sole proprietorship is the unlimited liability of the owner In case of failure of business, the creditors can recover their dues not only from the busmess assets but also from the personal assets of tne proprietor

(iv) Limited Managerial Ability An individual may not be good in all managerial tasks such as purchasing. seiling, financing, etc. Thus. decision making of a sole proprietor may not be effective in all the cases

Though sole propnetorsrup suffers from certa.n limitations, many entrepreneurs opt for ttus form of orqamsat-on because it requires less amount of capital and is best SUited for small businesses and where customers demand personalised services.

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

The Indian Partnership Act, 1932 delnes partnership as the relation between persons who have agreed to share the profit of the business carried on by all or anyone of them acting for all.” Some people consider partnership to be relatively unpopular because the inherent features of partnership such as JOint risk bearing and profit sharing, collective decision making. unlimited liability of partners. etc Sometimes lead to conflicts among partners and undue burden on some of the partners Besides. public confidence in partnership firm is low. But partnership as a form of business organisation actually has both merits and limitations as discussed below

Merits of Partnership

  1. Ease of Formation and Closure A partnership firm can be formed with minimal legal formalities by an agreement between the prospecltve partners whereby they agree to carryout the business of the firm and share risks. Registration of the firm is also not compulsory Closure of the firm can be done easily too.
  2.  Varied Expertise and Effective Decisions The partners can look after different functions according to their areas of expertise. This reduces the burden of work on ndividual partners and leads to more effective decisions.
  3. More Capital In partnership. the capital is contributed by many partners. Thus larger amount of funds are available as compared to a sole proprietor to undertake addit’onal operations when needed.
  4. Risk Sharing All the partners share the risks involved in running a partnership firm. This reduces the anxiety burden and stress on individual partners.
  5. Secrecy A partnership firm is not legally required to publish its accounts and submit reports. Hence. it can maintam confidentiality of information relating to its operations

Limitations of Partnership

(i) Unlimited Liability

The partners of a firm have unlimited liability Personal assets may be used for repaying debts if the business assets are msufncient. Further, the partners are Jointly and individually liable for payment of debts Hence if some partners are unable to pay the debt proportionate to their share, the others will have to repay the entire debt causing excessive burden on them.

(ii) Umited Resources

Partnership firms usually do not operate on a large scale as there is a restriction on the number of partners and hence. contribution in terms of capital investment rermains Insufficient for business expansion beyond a point.

(iii) Conflicts Decision making authority in a partnership is shared by all the partners Difference In opinion may thus lead to conflicts between partners Decisions of one partner are binding on other partners and a wrong decision by one may result in Imancial problem for all others.

If a partner decides to leave the firm due to conflicts thrs can result in termination of partnership as there IS a restriction on transfer of ownership.

(iv) lack of Continuity

Partnership comes to an end with the death, retirement. Insolvency or lunacy of any partner It may result in lack of continuity if the remaining partners do no enter Into a fresh agreement to continue the business.

(v) Low Public Confidence

Due to lack of transparency in the business of a partnership firm, the confidence of the public in partnership firms is generally low. It is difficult for the public to ascertain the true financial status of a partnership firm as it is not legally required to publish its financial reports or make other related information public.

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

After studying various terms of business organisations. it is evident that each form has certain advantages as well as disadvantages.

The important factors deterrn.nmq the choice of organisation are discussed below

  1. Cost and Ease of Starting Business Sole propnetorshrp is started easily as far as initial business setting-up costs and legal requirements are concerned. In case of partnership also, the advantage of less legal formalities and lower cost is there because of limited scale of operations. Registration is compulsory in case of co-operative societies and companies Formation of a company involves a lengthy and expensive legal procedure
  2. Liability In case of sole proprietorship and partnership firms, the liability of the owners/partners IS unlimited. This may result in payment of debt from personal assets of the owners. In joint Hindu family business, only the karta has unlimited liability. In co-operative societies and companies, however, liability is limited and creditors can force payment of their claims only to the extent of the company’s assets.
  3. Continuity The continuity of sole proprietorship and partnership firms is affected by events such as death, insolvency or Insanity of the owners. However, such factors do not affect the continuity of business in the case of organisations like JOintHindu family business, co-operative societies and companies.
  4. Managerial Ability It is difficult for a sole proprietor to have expertise in all functional areas of business. In other forms of organisations like partnership and company, there is division of work among the members which allows the managers to specialise in specific areas, leading to better decision making. But this may sometimes lead to conflicts due to differences of opinion Company form of organisation is a better alternative if the operations are complex in nature and require professional management.
  5. Capital Requirements For large scale operations, company form is the most suitable as large amount of funds can be arranged by issuing shares In this form. For medium and small sized business, one can opt for partnership or sole proprietorship. Capital requirements for expansion can also be met more easily in company form.
  6. Degree of Control Sole proprietorship provides direct control over operations and absolute decision making power. But if the owners want to share control for more effective decision making, partnership or company form of organisation can be adopted. In company form of organisation, professionals are appointed to manage the affairs of a company as there is complete separation of ownership and management.
  7. Nature of Business Sole proprietorship IS more suitable for businesses in which direct personal contact is needed with the customers such as in the case of a beauty parlour or grooery store. The company form of organisation is suited for large manufacturing units. Partnership form is much more suitable in case of professional services. The factors stated above are inter-related and therefore, all the relevant factors must be taken into consideration while making a decision with respect to the form of organisation.

Question 4. Discuss the characteristics, merits and limitations of co-operative form of organisation. Also describe briefly different types of co-operative societies.

Answer

According to The Indian Co-operative Societies Act, 1912, “Co-operative organisation is a society which has its objectives for the promotion of economic interests of its members in accordance with co-operative principles.”

Features of a Co-operative Society

  1. Voluntary Membership The membership of a co-operative society is voluntary. There is no compulsion for anyone to join or quit a society after serving a notice procedurally. Membership is open to all, irrespective of their religion, caste and gender.
  2. Legal Status Registration of a co-operative society is compulsory. This accords a separate Identity to the society which is distinct from its members. The society can enter into contracts and hold property in its name, sue and be sued by others. As a result of being a separate legal entity, it is not affected by the entry or exit of its members.
  3. Umited Liability The liability of the members of co-operative society is limited to the extent of the amount contributed by them as capital.
    This defines the maximum risk that a member can be asked to bear.
  4. Control In a co-operative 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 leads the co-operative society a democratic character.
  5. Service Motive The co-operative society through its purpose lays emphasis on the values of mutual help and welfare. Hence, the motive of service dominates its working. 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.

Merits of Co-operative Society

  1. Equality in Votes Co-operative society is governed by the principle of ‘one man one vote’. Each member is entitled to equal voUng rights irrespective of the amount of capital contributed by a member.
  2. Limited Liability The liability of members of a co-operative society is limited to the extent of their capital contribution and hence, the
    personal assets of the members oannot be used to repay business debts.
  3. Continuity Death, bankruptcy or insanity of the members do not affect continuity of a co-operative society.
  4. Economy in Operations The focus of co-operative society is on elimination of middlemen which helps in reducing costs. The members generally ofter honorary services to the society and the risk of bad debts is lower as customers or producers are members of the society too.
  5. Government Support The co-operative society is supported by the government in the form of low taxes, subsidies and low interest rates on loans.
  6. Ease of Formation The co-operative society can be started with a minimum of ten members and the registration procedure is done under Co-operative Societies Act, 1912.

Limitations of Co-operative Society

  1. Limited Resources Capital contributions in a cooperative society are from the members with limited means.
  2. Inefficient Management The members of co-operative societies are not professionals and offer honorary services on a voluntary basis. They are not equipped to carry out the management functions effectively.
  3. Lack of Secrecy It is difficult to maintain secrecy about the operations of a co-operative society due to open discussions in the meetings and disclosure obligations as per the Societies Act, (7).
  4. Government Regulations Co-operauve societtes have to comply with several rules and regulations related to auditing of accounts. submission of accounts. etc and also work under control of state co-operative departments.
  5. Internal Conflicts Internal conflicts arise when personal interests start dominating the welfare motive.

Types of Co-operative Societies

  1. Consumer’s Co-operative Societies The consumer co-operative societies are comprises to protect the Interests of consumers as Its aim is eliminating middlemen to achieve economy in operations and provide good quality products at reasonable prices it purchases goods in bulk directly from the wholesalers and sells goods to the members.
  2. Producer’s Co-operative Societies These societies are comprise to protect the interest of small producers and are set up to provide the supplying of raw materials equipment and other Inputs to the members and buying their output for sale Profits among the members are distributed on the basts of their contnbutions to the society.
  3. Marketing Co-operative Societies Such societies consist to help the small producers who wish to obtain reasonable pnces for their output and want to market their products. Its members jOintly perform marketing functions like transportation. warehousing, packaging, etc to sell the output at the best possible price and profits are distributed according to each member’s contnbutton to the pool of output.
  4. Farmer’s Co-operative Societies These societies comprise of farmers as members who Jointly take up farming activiues to gain the benefits of large scale farming and Increase the productivity. Such societies provide better quality seeds, fertilisers, machinery and other modern techniques to member farmers.
  5. Credit Co-operative Societies Credit co-operative societies are formed for providing easy credit on reasonable terms to the members These societies provide loans at low rates to members out of the amounts collected as capital and deposits from the members thereby eliminating exploitation by moneylenders.
  6. Co-operative Housing Societies Co-operative housing societies help people with low income to construct houses at reasonable costs and giving them the option of paying in instalments. These societies construct flats or provide plots to members for construction of houses.

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

Basis Partnership Joint Hindu Family
Business
Formation Easy formation with
An agreement between partners.
Easy formation with less legal formalities than Partnership.
Members Minimum members should be 2 and maximum 10 for banking and 20 for others. At least two persons for division of famIly property with no maximum limit of members.
Registration Requirement Registration is optional. Exemption from registrallon
Capital Contribution Limited but more than that can be raised In case of sole proprietorship. The captal contribution comes from Ancestral property.
Liability Liability of members is unlimited and joint. Liability is unlimited only for Karta while it is limited for
other members
Control and
Management
Partners take decisions Joint and constent of all partners is needed. Karta takes decisoos which are bindIng on other members.
Continuity Stable but affected by status of partners. Stable business, continues even in Karta dies through
Succession in family.

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

Answer

Sole proprietorship refers to a form of business organisation which is owned, managed and controlled by an individual who bears all risks and receives all profits. This form of business is suited mainly in areas of personalised services and small scale activities due to shortage of capital and limited abilities of an individual who is the proprietor. Still many people continue to prefer sole proprietorship over other forms of organisation as sole proprietorship offers many advantages such as

  1. Prompt Decision Making The decision making is prompt under sole proprietorship as there is considerable degree of freedom in making business decisions and there is no need to consult others as in case of partnership or co-operative. This results in effective capitalisation of market opportunities as and when they arise.
  2. Confidentiality All the information related to business operations is kept confidential and secrecy is maintained as the sole decision making authority rests with the proprietor unlike partnership or co-operative form. A sole proprietor is also not bound legally to publish firm’s accounts as in case of a company.
  3. Incentive to Work The sole proprietor receives all the business profits as a reward for bearing the business risk He/She is the single owner and does not need to share profit. This provides an incentive to the sole proprietor to work hard.
  4. Sense of Accomplishment There is a sense of personal satisfaction involved in working for oneself. It instils a sense of accomplishment and confidence in the individual as he/she is the one who takes all the decisions without any interference from others which is present in all other forms of organisation.
  5. Ease of Formation and Closure An important merit of sole proprietorship is the possibility of entering into business with minimal legal formalities. There is no separate law that governs sole proprietorship unlike other forms like co-operative or company. As sole proprietorship is the least regulated form of business, it is easy to start and close the business as per the wish of the owner.

Application Type Questions

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

Answer

In partnership form of organisation, a trade agreement made by one owner is binding on the others.

The Indian Partnership Act, 1932 defines partnership as “the relation between persons who have agreed to share the profit of the business carried on by all or anyone of them acting for all.’

The definition of partnership highlights the fact that it is a business carried on by all or anyone of the partners acting for all. One partner is an agent of other partners as he/she represents them and thereby binds them through his/her acts. He/She is a principal as he/she too can be bound by the acts of other partners Hence, every partner is both an agent and a principal. This is the reason why a trade agreement made by one owner is binding on the others.

Further, the partners are jointly responsible for the payment of debts and they contribute in proportion to their share in business and as such are liable to that extent. The partners share amongst themselves the responsibility of decrsion making and control of day-to-day activities.

Question 2. The business assets of an organisation amount to ₹ 50,000 but the debts that remain unpaid are ₹ 80,000. What course of action can the creditors take if

(a) The organisation is a sole proprietorship firm.

(b) The organisation is a partnership firm with Anthony and Akbar as partners.

Which of the two partners can the creditors approach for repayment of debt? Explain giving reasons.

Answer

(a) The organisation is a sale proprietorship firm Sale proprietors have unlimited iability This impl es that the owner is personally responsible for payment of debts in case the assets of the business are not sufficient to meet all the debts. As such the owner’s personal possessions such as his/her personal car and other assets could be sold for repaying the debt. In the given case the total debts that remain unpaid are ₹ 80,000 but the organisational assets amount to ₹ 50,000 only. In such a situation the creditors can demand from the proprietor to pay ₹ 30,000 from his/her personal sources even If he/she has to sell his/her personal property to repay the firm’s debts.

(b) The organisation is a partnership firm with Anthony and Akbar as partners The partners of a firm have unlimited liability. Personal assets may be used for repaying debts In case the business assets are insufficient. As the total debts that remain unpaid are ₹ 80,000 but the organisational assets amount to ₹ 50,000 only, the creditors can demand from both or any of the partners Anthony and Akbar to pay ₹ 30,000 from their personal sources even If they have to sell their personal property to repay the firm’s debts.

In the gIven situation, creditors can demand the payment of debt from both Anthony and Akbar as the partners are jointly hable for payment of debts and they contribute in proportion to their share in business as they are liable to that extent However, if one of them is not available or is unable to pay, the other partner will have to pay the creditors as each partner can be held responsible for repaying the debts of the business Such a partner can later recover from the other partner an amount of money equivalent to the share jn liability deftned as per the partnership agreement

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 country wide.

(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 organisation?
(d) What legal formalities will she have to underqo to operate business as a company?

Answer

(a) Kiran may have the following two benefits of remaining a sole proprietor.

  1. Being the sole proprietor Kiran can enjoy all the profit earned from the business without having the need to share it with anyone.
  2. She does not have to publish accounts or be regulated under any law governing sole proprietorship which maintains secrecy of the business activities.

(b) Kiran may have the following two benefits of converting to a Joint Stock Company.

  1. She will be able to acquire the funds required for expansion of her retail chain branches country wide through share capital in a Joint Stock Company.
  2. Public has more faith in a Joint Stock Company than in a sale proprietorship firm which will help In increasing the customer base for Kiran’s business.

(c) Her decision to go nationwide involves an Increase in her scale of operation, requirement of capital and management abilities. As a sale proprietor, she may face limitations of resources and her limited managerial ability. She may not be good In all managerial tasks such as purchasing. selling. financing, etc. Thus, her decision making may not be effective in all the situations especially when there are complexities of large scale operation. Besides. she will have to bear more risk individually if she remains a sole proprietor and her liability will increase to a large extent. All these factors will definitely playa role in her choice of form of organisation and she will have much stronger reasons to form a Joint Stock Company in this case.

(d) The formation of a company requires greater time. effort and extensive knowledge of legal requirements and the procedures involved. To operate her business as a company. first of all, Kiran will have to prepare several documents and will have to ensure compliance with several legal equirements before it can start functioning. She will have to register her company registration of the company is compulsory as provided under the Indian Companies Act. 1956.

The Companies Act requires each public company to provide a lot of information to the office of the registrar of companies from time-to-time which Kiran will have to provide. The functioning of a company is subject to many legal provisions and compulsions A company has to comply with various restrictions including audit, voting, filing of reports and preparation of documents, and is required to obtain various certificates from different agencies such as registrar, SEBI, etc.

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