Unit – II: Forms of Business Organisation
Short Question and Answer
(1/2/3 Marks)
1. Varun is the only owner of his
restaurant. Name the form of business organization.
Ans: Sole proprietorship.
2. Name the form of organization found
only in India
Ans: Joint Hindu Family or Hindu Undivided Family
3. List two merits of Sole
proprietorship.
Ans: (i) Single ownership (ii) Full control.
4. Name any one business in which sole
proprietorship is most suitable.
Ans: Tailoring
5. Name the type of partnership which
is formed to accomplish a specific project for a specific time.
Ans: Particular partnership
6. State any one consequence of non
registration of a partnership firm.
Ans: An unregistered firm cannot file a case
against third parties.
7. What is the minimum number of
persons required to form a cooperative society? 2008
Ans: Ten
8. Name the type of company which can
invite the public to subscribe for the shares or debentures.
Ans: Public.
9. Name the process by which a joint
stock company is registered.
Ans: Incorporation.
10. Name the document which defines
the object and powers of the company.
Ans: Memorandum of Association.
11. What is the minimum and maximum
number of members in a private company?
Ans: Minimum number of members is 2 and the maximum 50, excluding
its present or past employee members.
12. What is the minimum and maximum
number of members in a public company? 2009
Ans: Minimum number of members is 7 and there is no limit as to
maximum numbers.
13. What is the minimum and maximum
number of members in a partnership business? 2010
Ans: In a partnership firm there must be at least two people and
maximum numbers of person is 10 for a partnership carrying on banking business
and 20 in case of other kinds of business.
14. What is sole tradership? 2000, 02,
10
Ans: Sole proprietorship is the form of business, which is owned,
managed and controlled by an individual. It is the simplest form of business,
established with the limited resources, ability and capital of the individual
known as sole trader or entrepreneur.
Q.15. When sole trade business is
considered suitable? 2008,
2015
Ans: To give you an idea what kind of business are suitable sole proprietorships, consider the following business. These would be suitable for a sole proprietorships:
a) Where the market for the product is small & local. For example, selling grocery items, books, stationery, vegetables, etc.
b) Where customers are given personal attention, according to their personal tastes and preferences. For example, making special type of furniture, designing garments, etc.
c) Where the nature of business is simple. For example, grocery, garments business, telephone booth, etc.
d) Where capital requirement is small and risk involvement is not heavy. For example, vegetables and fruits business, tea stall, etc.
e) Where manual skill is required. For example, making jewelery, haircutting or tailoring, cycle or motorcycle repair shop, etc.
Q.16. When partnership business is
considered suitable?
Ans: Partnership firm is suitable under the following conditions:
a)
The business is run on a small or medium scale
b)
Personal touch with the customers or clients
is essential
c)
It is convenient for the professionals to form
partnership
d)
It facilitates partnership between those
having capital and those having technical qualifications.
Q.17. What do you mean by Goodwill? 1999, 2001,
2003
Ans: Goodwill: Goodwill is the value of the reputation of a firm
in respect of profits expected in future over and above the normal profits.
Q.18. What is unlimited liability? 2003, 07, 09, 2018
Ans: When the liability of partners exceeds the amount invested by
them in business, such liability is called unlimited liability.
Q.19. What is dissolution of firm? 2000, 01
Ans: Dissolution of a firm means discontinuation of the firm’s business and the relationship between the partners. According to Sec. 39 of Indian Partnership Act 1932, “Dissolution of firm means dissolution of partnership between all the partners in the firm."
Long
answer type questions
Q.1. What is sole proprietorship?
Mention its features. What are its merits and demerits? 01, 02, 04, 05, 06, 09
Ans: Sole
proprietorship is the form of business, which is owned, managed and controlled
by an individual. It is the simplest form of business, established with the
limited resources, ability and capital of the individual known as sole trader
or entrepreneur.
Features: 2016
a)
Easy to form and close
b)
Unlimited Liability
c)
One bearer of profit and loss
d)
One man Control
e)
No separate entity
f)
Lack of business continuity.
Merits of
sole proprietorship:
a)
A sole proprietor can take decision quickly.
b)
Information can be kept secretly without any
leakage.
c)
No need to share profits.
d)
He gets self satisfaction for the work he has
done.
e)
Easy to start and to close because of less
rules and regulations.
Limitations
of Sole Proprietorship
a)
Unlimited liability.
b)
Limited finance/capital, business will remain
small.
c)
The owner normally spends long hours working.
d)
Some parts of the business can be inefficient
because of lack of specialists.
e)
Does not benefited from economies of large scale.
f)
No continuity,
no legal identity.
Q.2. What is Joint Hindu Family?
Mention its features. What are its merits and demerits? 2017
Ans: A Joint Hindu Family Business may be defined as a form of
business organization in which all the male members of a Hindu Undivided Family
Carry on business under the management and control of the head of the family
called “Karta”.
The members of the family are known as 'Co-parceners'.
Features:
a)
Formation by operation of Hindu Law
b)
Unlimited Liability of Karta
c)
Full Control by Karta
d)
Continuous existence
e)
Minor can also be members.
Following
are the important advantages of Joint Hindu Family business:
a)
Easy Formation: A joint Hindu family Business
comes into existence by operation of Hindu law. There are no legal formalities
or contracts required to bring it into existence.
b)
Economy: The liability of "Karta"
i.e. the head of the family is unlimited, so he is careful, judicious and
economical in business expenditure.
c)
Secrecy: The secrets of business are known to Karta
only.
d)
Continuity of Operations: The joint Hindu
family business enjoys continuous existence even after the original karta
is no more. It is stable and comes to an end only after the total breakdown of
the joint family
e)
Direct contact with customers: It has direct
contact with customers. The company can provide personal attention to the
requirements of its customers resulting in growth of the business.
Limitations of Joint Hindu Family
a)
Limited resources
b)
unlimited liability of karta
c)
Karta’s dominance over Joint Hindu Family
d)
Limited managerial skills.
Q.3. What is Partnership? Mention its
features. What are its merits and demerits? 99,
Ans: According to section 4 of the Company’s act 1932,"
Partnership is a relation between two or more persons who have agreed to share
the profits of a business carried on by all or any one of them acting for
all."
Partnership in this way is an agreement,
between two or more persons to carry on legal business with profit motive,
which is carried on by all or any one of them acting for all.
Essential (Characteristics) of Partnership:
a)
Contract:
Partnership is the result of contract between the partners.
b)
Number of
Persons: In a partnership firm there must be at least two people and
maximum numbers of person is 10 for a partnership carrying on banking business
and 20 in case of other kinds of business.
c)
Profit-Sharing: The
agreement between/among partners must be to share profit or losses.
d)
Business: Business
must be carried on by all the partners or any one of them acting as agent of
other partners.
e)
Motive: For a
partnership firm there must be motive to earn profit. A partnership firm cannot
be formed with service motive.
f)
Legality
of the Business: The business to be carried on by the partners
must be legal.
Merits of
partnership:
1. Easy to form a partnership firm 2. Facility of large financial resources 3. Better management of operations 4. Sound
decisions 5. Sharing of risks 6. Flexibility in operations 7. Greater
motivation because of unlimited liability 8. Maintenance of secrecy 9. Easy to
dissolve the firm
Limitations
of Partnership:
1. Less capital as compared to a company 2.
Unlimited liability 3. Conflict between partners 4. Slow decision making 5. Non- public confidence 6. Uncertain life of the firm
Q.4. What are various types of
partners and partnership? 1999,
00, 03, 04, 05, 08,17
Ans: Types of Partners:
a)
Active partner: An active
partner is a partner who gives capital, participates in management, shares the profits and losses and has unlimited
liability.
b)
Sleeping partner or
Dormant Partner: A Partner who do not take part in the business activities.
c)
Secret partner: A partner
who has association with the firm but unknown to the public.
d)
Nominal partner: A partner
who allows his name to be used by the firm
e)
Partner by estoppel:
A
person who by behaviour sets an impression to others that he/she is a partner
of the firm.
f)
Partner by holding
out: A
person who is not a partner but allows himself to be represented as partner in
a firm.
Kinds of
Partnership:
Partnership firms are of two type’s viz.,
General Partnership and Limited Partnership.
1. General Partnership: In this case the liability of all the
partners is unlimited. General
Partnership can be further divided into two types i.e. (i) Partnership at Will,
and (ii) Particular Partnership. These are explained as under:
(i) Partnership at will: When a partnership firm is constituted
for unspecified period, it is known as Partnership at will. It can be dissolved
by any partner by giving a notice indicating that he wants to withdraw his
interest from the firm.
(ii) Particular partnership: As the very
name suggests, this type of partnership is formed for conducting business of
specific or temporary nature. The partnership comes to an end either on the
accomplishment of the task for which the partnership was undertaken or on the
expiry of the time period for which the firm was constituted.
2. Limited Partnership: Under this type
of partnership some of the partners have unlimited liability while others have
limited liability up to their individual share in the capital of the firm.
Q.5. What is partnership deed? Mention
its contents. 99, 05,
07, 10, 15, 2016
Ans: Partnership deed: It is a written agreement between the
partners of a firm. It contains several clauses regarding name and address
of partners, nature of business, Capital, profit sharing ratio etc.
Contents of Partnership Deed:
a)
Names and address of partners
b)
Nature and scope of business
c)
Duration of partnership
d)
Contribution of capital by the partners
e)
Sharing of profit or loss
f)
Loans to and by the partners
g)
Commission and salary of partners
h)
Amount of drawings and interest on drawings
for each partner.
i)
Rights, duties and liabilities of partners
j)
Admission and retirement of partners
Q.6.
What are the consequences of non-registration of a Partnership? 03, 05, 08, 2018
Ans: An unregistered
partnership firm suffers from the following limitations:
a)
It cannot enforce its claims against a third
party in a court of law.
b)
It cannot claim adjustment for any sum
exceeding Rs. 100.
c)
It cannot file a legal suit against any of its
partners.
d)
Partners of an unregistered firm cannot file
any suit to enforce a right against the firm.
e)
A partner of an unregistered firm cannot file
a suit against other partners.
Non-registration
of a firm, however, does not affect the following rights:
a)
The right of a partner to sue for the
dissolution of the firm or for the accounts of a dissolved firm.
b)
The power of an Official Assignee or Receiver
to realise the property of an insolvent partner.
c)
The rights of the firm, or its partners,
having no place of business.
d)
Any suit or set off in which the claim does
not exceed rupees one hundred.
e)
The right of a third party to sue the unregistered
firm or its partners.
Q.7. Mention the procedure for
registration of partnership. 2000,
2018
Ans: Procedure for Registration: In order to get a partnership firm
registered an application in the prescribed form must be filed with the
Registrar of Firms. The application should contain the following information:
(i) The name of the firm
(ii) The principal place of business of the
firm.
(iii) Names of other places where the firm's
business is carried on.
(iv) Names in full and permanent addresses of
the partners.
(v) The date on which each partner joined the
firm,
(vi) Duration of partnership, if any.
The application should be signed and verified
by each partner. A small amount of registration fee is also deposited along
with the application. The application submitted to the Registrar is examined.
If everything is in order and all legal
formalities have been observed, the Registrar shall make an entry in the
register of firms. He will also issue a certificate of registration.
Q.8. What is Cooperative Society?
Mention its features. What are its merits and demerits? 2006, 08
Ans: A co-operative society is a voluntary
association started with the aim of service of its members. It is a form of
business where individuals belonging to the same class join their hands for the
promotion of their common goals. A Co-operative Society is established by group
ten or more persons who voluntary come together for mutual benefit. It is based
on the principles of collective effort, mutual self-help, equality and freedom.
Salient features of cooperative societies
a)
Voluntary organization
b)
Suited for relatively economical weaker
sections
c)
Objective is mutual help and service motive
d)
Common interest of members
e)
Open membership
f)
Democratic set-up: One person-one vote principle
g)
Separate legislative entity: Registration is
required
Advantages of Cooperative Society
a)
Easy to form: The formation of a cooperative society
is very simple as compared to the formation of any other form of business
organisations.
b)
No obstruction for membership: Nobody is
obstructed to join on the basis of religion, caste, colour etc.
c)
Limited liability: In most cases, the liabilities of the
members of the society are limited to the extent of capital contributed by
them.
d)
Service motive: In Cooperative society members are
provided with better good and services at reasonable prices.
e)
Democratic management: Every member has equal rights through
its single vote but can take active part in' the formulation of the policies of
the society.
Disadvantages
or the limitations of a co-operative organisation:
a)
Limited Capital: Co-operative societies are
generally formed by the weaker section of the society. The members can invest
only a limited capital.
b)
Lack of Competent Management: Co-operative
societies are managed by the elected representatives of the members who
generally possess neither the experience, nor the technical and professional
qualification to run a business organisation.
c)
Lack of Secrecy: The affairs of a co-operative
society are openly discussed in the meetings of the members. This makes it very
difficult for the societies to keep their secrets closely guarded.
d)
Non-cooperation and Infighting: The members of
a society generally belong to the same locality or occupation; they have their
own personal prejudices and professional jealousies against each other.
e)
Lack of Motivation: Laws governing the
co-operatives prescribe a ceiling on the vote of return. This may dampen
initiative and efforts on the part of members.
Q.9. What are various types of
Cooperative Societies? 2016
Ans: Types
of co-operatives:
a)
Consumers’ cooperative societies: This types
of business is owned by the customer for their mutual benefits. It basic aim is
to eliminate middlemen and sale goods at a cheaper rate to its members.
b)
Credit Cooperative societies: These types of
society is formed by the group of individuals to promote their economic and
social betterment. Its main aim is to arrange credit for its members at a
competitive rates.
c)
Producers cooperative societies: These
societies are formed for the purpose of marketing, support and purchasing of
goods of its member who are producing similar products.
d)
Marketing cooperative societies: Marketing
cooperatives are established by farmers to undertake transportation,
packaging, distribution, and marketing of farm products (both crop
and livestock).
e)
Farmers cooperative societies: Farmers' co-op,
is a cooperative where farmers pool their resources such as
land, machinery and provide various services to their individually farming
members.
f)
Housing cooperative societies: A housing cooperative, co-op, or housing company, is a
legal entity, usually which owns real estate, consisting of one or more
residential buildings for the benefit of its members.
Q.10. What is Joint Stock Company?
Mention its features. What are its merits and demerits? 2007, 15
Ans: A Joint
Stock Company is an association of many
persons who contribute money or money’s worth to a common stock and employs it
for a common purpose. The common stock so contributed is denoted in money and
is capital of the company. The persons who contribute it or to whom it belongs
are members. The proportion of capital to which each member is entitled is his
share.
Features of a Company
a)
Artificial Person: A company is an
artificial person, which exists only in the eyes of law.
b)
Created by law: A company can be
formed only with registration.
c)
Perpetual succession: A company has a
continuous existence.
d)
Limited Liability: The liability of
every member is limited to the face value of shares, held by him.
e)
Voluntary Association: A company is a
voluntary association.
f) Common Seal: As a company is an artificial person, so it acts through its common seal.
|
Advantages
of a company 2018 1. Huge capital 2. Limited liability 3. Perpetual existence 4. Transferability of shares 5. Specialized management 6. Scope for expansion 7. Wider distribution of risk 8. Public confidence |
Disadvantages
of a Company 1. Difficulties in formation 2. Excessive government regulations 3. Lack of secrecy 4. Slow decision making 5. Lack of Personal touch 6. Conflicts among shareholders 7. Fraudulent practices by promoters /directors 8. Difficulty in winding up |
Ans: Types of
Companies
A.
Classification on the basis of liability
1.
Companies with limited liability : (a) Companies limited by shares (b) Companies limited
by guarantee.
2. Unlimited companies.
B. Classification on the basis of number of
members
1. Private company
2. Public company
C. Classification on the basis of control
1.
Holding company
2. Subsidiary company
D.
Classification on the basis of ownership
1.
Government company
2. Non-government company
3. Foreign company
Q.12. Distinguish between private and
public company. 08,
10, 2018
Ans: Difference between Public Limited
Company and Private Limited Company
|
Basis of
Difference |
Private
Company |
Public
Company |
|
Number of persons |
Minimum number of members is 2 and the maximum 200, excluding
its present or past employee members. |
Minimum number of members is 7 and there is no limit as to
maximum numbers. |
|
Transfer of Shares |
Transfer of shares is generally restricted by the articles of
association of a private limited company. |
The shares of a public company are freely transferable. |
|
Number of Directors |
A Private Company must have at least two directors. |
A Public Company must have at least three directors. |
|
Name |
The word ‘Private Limited’ must be used as a part of the name. |
The word ‘Limited’ must be used as a part of the name. |
Q.13. What are various factors to be
considered for starting a business? 2008,
2017, 2019
Ans: Basic factors to be considered before starting a Business:
a)
Selection of Line of Business: Type of
business is to be selected on the basis of requirement in the market.
b)
Size of the Firm: Size of the firm whether
large scale or small scale is to be decided on the basis of the amount of funds
available and demand for the product in the market.
c)
Choice of form of ownership: The form of
ownership is to be decided on the basis of the amount of capital required,
legal formalities to be filled in, liability of the owner
d)
Location of the Business enterprise: Location
of the Business is to be selected on the basis of the availability of raw
material and infrastructure facilities
e)
Financing the Proposition: Requirement of
Capital and its sources must be decided before starting a business.
f)
Physical facilities: Availability of physical
facilities including machines and equipment, building and supportive services
to be considered before starting a business.
g)
Plant layout: Plant layout should be drawn to
show the arrangement of these facilities.
h)
Competent and committed worked force: Every
business needs work force. So careful planning should be made about the
selection, training and motivation of employees.
i)
Tax Planning: Tax liability and its impact on
business to be considered before starting a new business.
Q.14. Explain the factors that determine the
choice of the form of business organisation. 2007,
10, 2016
Ans: Criteria for the Choice of Organization: The following
factors will be taken into account before choosing the form of business
organisation:
(i)
Ease of formation: An ideal form of organisation is one which can be brought
into existence with the least difficulty and expenses.
(ii)
Ease of financing: Another important feature of a good form of organisation is
the facility of raising the required amount of capital.
(iii)
Limited liability: From the point of view of risk, the businessman will
naturally prefer that form of business orgnisation where his liability is
limited (alike companies).
(iv)
Direct relationship between ownership and control of management: There must be
direct relationship between ownership and control of management. If the control
is not with the owners, the management may not show required interest in
maximising profits through increase in efficiency
(v)
Flexibility of operations: A good form of organisation offers the maximum
flexibility and adaptability. The organisation should be such which can be
changed easily if situation so demands.
Q.15. What are various mode of
dissolution of a Partnership Firm? Explain them briefly. 2000, 04, 06, 09, 2016
Ans: Modes of Dissolution of a Partnership Firm:
i.
Compulsory
dissolution;
ii.
Dissolution
on the happening of certain contingencies;
iii.
Dissolution
by notice of partnership at will;
iv.
Dissolution
by the court.
i) Compulsory Dissolution: A firm is
dissolved compulsorily by the adjudication of all the partners or of all the
partners but one as insolvent, or by the happening of any event which makes it
unlawful for the business of the firm to be carried on or for the partners to
carry it on in partnership.
ii) Dissolution on the Happening of Certain
Contingencies: Subject to contract between the partners, a
firm is dissolved:
i.
if
constituted for a fixed term, by the expiry of that term;
ii.
if
constituted to carry out one or more adventures or undertakings, by the
completion thereof;
iii.
by
the death of a partner; and
iv. By the adjudication of a partner as an
insolvent.
iii) Dissolution by Notice of Partnership at
Will: Where the partnership is at will, the firm may be dissolved by
any partner giving notice in writing to all the other partners of his intention
to dissolve the firm. The firm is dissolved as from the date mentioned in the
notice as the date of dissolution or, if no date is so mentioned, as from the
date of the communication of the notice.
iv) Dissolution by Court: A court
may order a partnership firm to be dissolved in the following cases:
i.
When
a partner becomes of unsound mind
ii.
When
a partner becomes permanently incapable of performing his/her duties as a
partner,
iii.
When
partner deliberately and consistently commits breach of agreements relating to
the management of the firm;
iv.
when
a partner’s conduct is likely to adversely affect the business of the firm;
v.
when
a partner transfers his/her interest in the firm to a third party;
vi.
When
the court regards dissolution to be just and equitable.
Q.16. Discuss in detail the reasons
for the superiority of Joint-Stock Company over Sole proprietorship and
partnership. 2015
Ans: Sole Trade business: A sole proprietorship implies a one-man
show and in case more partners are taken on to fastens growth, the structure of
the firm has to be changed to a partnership firm or a company. Lenders are also
unwilling to lend as the business is in the hands of one individual and so, the
risk is high. In case of liabilities arising from the conduct of the business,
the losses have to be covered by the personal assets of the proprietor. The
liability of the proprietor to pay off all creditors is unlimited.
Partnership Firm: Two or more people can come together
to form a partnership firm. It is required to draft a partnership deed, which
is signed by all the partners indicating the formation of the partnership. The
advantage of the partnership firm is that two or more people can come together
to start a business and the regulatory and disclosure norms are relatively
simple. The main disadvantage is that even in this form of business, the
partners’ liability to pay off creditors is unlimited.
Company: A company may either be a private limited company or may
be formed as a public limited company. The members of the company appoint
directors who are responsible for the management of the company. The directors
are collectively known as the Board of Directors. A private limited company can
be formed with a minimum of two members and a public company may be formed with
a minimum of seven members. A private limited company can have a maximum of 50
members excluding employee-members; whereas there is no maximum limit on the
number of members of a public company.
The major advantage of a company set-up is that the liability of
the members is restricted to the extent of the member’s investment in the
company; his/her personal property is not put at risk. The company form of
organization is most suitable for modern times because it provides a route
whereby ownership (members) can be separated from management (directors).
Though members can become directors, it is not always necessary.
Even outsiders can be appointed as directors. The funding may be provided by
the investor-members and the management may be in the hands of the
promoter-members. If required, the investor-members may be appointed as
directors.