Ch – 2 Forms of Business

Learning
• Different forms of business organisation;
• Features, merits and limitations of different forms
• Difference between forms of organisations
• Factors determining choice of an appropriate form
of business organisation.

( All above may come as question also)

 Ch – 2 NCERT Questions
Short Answer Questions
1. Compare the status of a minor in a Joint Hindu family
business with that in a partnership firm.
2. If registration is optional, why do partnership firms willingly go
through this legal formality and get themselves registered?
3. State the important privileges available to a private company.
4. How does a cooperative society exemplify democracy and
secularism?
5. What is meant by ‘partner by estoppel’? Explain.
6. Briefly explain the following terms in brief.
(a) Perpetual succession (b) Common seal
(c) Karta (d) Artificial person
(Check MCQs from ncert)
 Long Answer Questions
1. What do you understand by a sole proprietorship firm?
Explain its merits and limitation?
2. Why is partnership considered by some to be a relatively
unpopular form of business ownership? Explain
3. Why is it important to choose an appropriate form of
organisation? Discuss the factors that determine it.
4. Discuss the characteristics, merits and limitation of
cooperative form of organisation. Also describe briefly
different types of cooperative societies.
5. Distinguish between a Joint Hindu family business and
partnership.
6. Despite limitations of size and resources, many people
continue to prefer sole proprietorship over other forms of
organisation? (Check Application based from ncert)
 Classification On the basis of ownership

CORPORATE FORM - the identity of the enterprise is separate from its owner
NON CORPORATE FORM - the identity of the enterprise is not different from that of its owners
 1. Sole Proprietorship
- A business owned, financed and controlled by a single person
who is recipient of all profit & risk.
- It is suitable for personalized services like retail shop, parlor,
Small scale production or industry etc
Features
1. Single ownership: It is wholly owned by one individual.
2. Control: Sole proprietor has full power of decision making.
3. No separate legal entity: No difference bet business & owner
4. Unlimited liability: The liability of owner is unlimited. Even
personal property of owner can be used for paying debts
5. No legal formalities: Not required to start / manage / close
6. Sole risk bearer and profit recipient: Owner bears the
complete risk and there is no body to share profit/loss.
 Merits
1. Easy to start and close: No much legal formalities required
2. Quick decision : Consultation with others not required
3. Sense of accomplishment: He gets sense of satisfaction.
4. No legal formalities: Even to start / manage / dissolve it
5. Sole profit recipient: There is no one to share profit/loss
LIMITATIONS
1. Limited finance : Limited to owner's savings / borrowings
2. Limited Managerial ability: Alone him can’t be good in all
aspects of business and he can’t afford to employ experts
3. Unlimited liability:  He is sole risk bearer. No one to share
4. Uncertain life: Death, insolvency, lunacy or illness of a
proprietor affects the business and can lead to its closure.
5. Limited scope for expansion:- Due to limited capital and
managerial skills, it cannot expand to a large scale.
 2. JOINT HINDU FAMILY BUSINESS (HUF)
• It is owned by members of undivided joint Hindu family and
managed by eldest member of family known as KARTA.
• It is governed by Hindu law. Basis of membership is by birth
• 3 successive generation can be member (HUF is only in India)
FEATURES
1. Formation - Minimum 2 members in the family and some
ancestral property to be inherited by them
2. Membership by birth - There are two systems
Dayabhaga System- (In West Bengal) Allows both male and
female member to be coparceners.
Mitakshara System- (Except WB) Allows only male members
to be coparceners.
3. Liability - Karta’s unlimited but members is limited to their share
4. Continuity - The business is not affected by death of Karta next senior
male member becomes the Karta
5. Minor members - A minor can also become full fledged member
 Difference between Coparceners and members
• Male members in a HUF are known as coparceners
• Female members are simply known as the members
Coparceners (Male) can demand HUF partition
Female members don't have this right.

Gender Equality in HUF

After Hindu Succession (Amendment) Act, 2005,
Daughter of a coparcener of HUF shall become coparcener by birth
Married daughter has equal rights in property of HUF.

At the time of partition the property shall be equally divided to all

the coparceners irrespective of their gender.

The eldest member, male or female, of ‘Joint Hindu Family’

shall become Karta.
 MERITS
1. Effective control- Karta’s decision power / timeliness
2. Continued business existence- The death, Lunacy of Karta
will not affect as next eldest member will take up the position.
3. Limited liability - Except Karta, member’s liability is limited
4. Secrecy - Secrecy regarding decisions can be kept by Karta
5. Loyalty and Co-operation: It helps in securing better co-
operation and greater loyalty from all the members
LIMITATION
1. Limited capital: Capital is limited to the ancestral property.
2. Unlimited liability of karta - It makes him less enterprising.
3. Dominance of karta - Karta may ignore others / conflicts it
4. Hasty decisions: Karta is overburdened / he may do mistakes
5. Limited managerial skills of karta pose a serious problem.
6. HUF is on decline due to less of joint families in India
 3. PARTNERSHIP
It is a voluntary association of two or more persons who agree
to carry on some business jointly and share its profits & losses.
FEATURES
1. Two or more persons: Min – 2 & Max 20 persons in Non-
Banking (10 in Banking) are needed to form a partnership
2. Agreement: It is agreed terms which may be oral / written.
3. Lawful business- Only for carrying on lawful business.
4. Decision making & control - Every partner has a right to
participate in management & decision making
5. Unlimited liability - All partners have unlimited liability.
6. Mutual Agency - Every partner is an agent of the other
partners & firm. Each liable for acts performed by other.
7. Lack of continuity - Firms existence is affected by the death,
Lunacy and insolvency of any of its partner.
 MERITS
1. Easy to form / close - Easily formed with an agreement
2. Larger financial resources - There are more funds as capital
is contributed by number of partners.
3. Balanced Decisions -  Jointly taken decisions / much better
4. Sharing of Risks - Risk is shared / reduces anxiety, burden
5. Secrecy - No account publishing to gov/ secrecy can be kept
LIMITATIONS
1. Limited resources - Capital restricted to number of partners
2. Unlimited liability- Unlimited liability of all partners (cross)
Big drawback – for partners having greater personal wealth
3. Lack of continuity - Partnership comes to an end with the
death, retirement, insolvency or lunacy of any of its partner.
4. Lack of public confidence - Reports and accounts are not
required to published hence lack public confidence.
 Type of Capital Management Share in Liability
Partner Contribution profit / loss

Active partner Contributes Participates in Shares profits UNLIMITED

management / losses

Sleeping or Contributes Does not Shares profits UNLIMITED

dormant partner participate / losses

Secret partner Contributes Participates in Shares profits UNLIMITED

Management / losses

Nominal Partner Does not Does not Generally UNLIMITED

contribute participate doesn’t share

Partner by Does not Does not Does not UNLIMITED

estoppel contribute participate Shares

Partner by holding Does not Does not Does not UNLIMITED

out contribute participate Shares
 Types of Partnership
A. Classification on the Basics of Duration
Partnership at will- This exists at the will of partners.
Particular Partnership- Formed for a specified purpose or
time period. Dissolves as it is fulfilled or time expires
Like - A particular project (construction of a building)
B. Classification on the basis of Liability
General partnership- Liability is limited & joint.
Registration of firm is optional.
Limited Partnership- Liability of at least one partner shall be
unlimited whereas other partners may have limited.
Registration of firm is compulsory.

Minor (Below 18) as a Partner- As considered incapable of enlarging into a valid

agreement, he cannot become a partner of firm. However, a minor can be admitted to
the benefits of an existing partnership firm with the mutual consent of other partners.
He wont bear the losses & also liability will be limited to his contribution only.
 PARTNERSHIP DEED
The written agreement on a stamped paper which specifies
terms & conditions of partnership is called the partnership deed.
It generally includes the following aspects –
1. Name of the firm
2. Location / Address of the firm
3. Duration of business.
4. Investment made by each partner.
5. Profit sharing ratio of the partners
6. Terms - salaries, drawing, interest on capital and drawing of partners.
7. Duties & obligations of partners.
8. Terms governing admission, retirement / expulsion of a partner
and preparation on of accounts & their auditing.
9. Method of solving dispute
REGISTRATION OF PARTNERSHIP
Registration is not compulsory it is optional.
But it is always beneficial to get the firm registered.
• A partner of an unregistered firm cannot file suit against the firm or the partner.
• The firm cannot file a suit against third party.
• The firm cannot file a case against partner.
 4. Co-operative Society
It is a voluntary association of persons who unite together to
protect & promote their common economic interests.
FEATURES
1. Voluntary association: Every one having a common interest is
free to join & leave society after giving proper notice.
2. Legal status: Registration is must / A separate legal identity.
3. Limited liability: Member’s liability is limited to contribution
4. Democratic control: Management & Control lies with the
managing committee elected by the members by giving vote.
Each one has one vote irrespective of his shares holding.
5. Service motive: Aim is not Max profit but to serve members
6. Bound by govt.’s rules: They have to abide by Gov rules
7. Distribution of surplus: The profit is distributed on the basis of
volume of business transacted by a member and not on the basis
of capital contribution of members.
 MERITS
1. Excise of formation: It can be started with minimum of 10 members.
Registration is also easy as it requires very few legal formations.
2. Limited Liability: The liability of members is limited to their contribution.
3. Stable existence: It is a separate legal entity and is not affected by the death,
luxury or insolvency of any of its member.
4. Economy in operations: Due to elimination of middlemen and
5. Government Support: Govt. provides support by giving loans at lower interest
rates, subsidies & by charging less taxes.
6. Social utility: It promotes personal liberty, social justice and mutual
cooperation. They help to prevent concentration of economic
LIMITATIONS
1. Shortage of capital - Usually formed by people with limited means.
2. Inefficient management - Managed by elected members who may not be
competent and experienced. It can’t afford to employ expert at high salary
3. Lack of motivation - No best efforts as direct link of efforts and reward.
4. Lack of Secrecy - Its affairs are openly discussed in its meeting
5. Excessive govt. control - It has to get its accounts audited by the
6. Conflict among members - some members become rigid results in conflict.
 TYPES OF CO-OPERATIVE SOCIETIES
1. Consumers co-operative Society - It is formed to protect the interest
of consumers. It eliminates middleman with direct approach
- It purchases daily use goods directly and sells it to members at
reasonable price.
- Profits is distributed on the basis of capital invested / purchases

- 2. Producer's Co-operative Society - It is to help small producers to

buy them raw material, tools etc with enhanced bargaining power
- Soc also purchases their finished product for sale and marketing
- Profit is generally distributed on the basis of produce or sell.

3. Marketing Co-operative Society - It is to perform various marketing

function like transportation, warehousing, packing, grading, marketing etc
- The production of different members is pooled together and sold by
society at good price.
- Profit is divided on the basis on contribution to the pool of output.
4. Farmer’s Co-operative Society - Small farmers join together
and pool their resources for cultivating their land collectively.
- Soc provide better quality seeds, fertilizers, machinery and
modern techniques for use in the cultivation of crops.
- It improves yield & solves problem of fragment land holding

5. Credit co-operative Society - It provide loans to their

members at easy terms and reasonably low rate of interest
- It protects members from exploitation by money lenders.

6. Co-operative Housing Society - The main aim is to provide

houses to people with limited means / income.
- Soc holds the land and allows members to construct houses
- It provides the option of paying in instalments
 5. JOINT STOCK COMPANY
• Joint stock company is a voluntary association of persons for
profit, having a capital  divided into transferable shares, the
ownership of which is the condition of membership.
FEATURES
1. Incorporated association - (artificial existence) company
must be incorporated or registered under companies Act 1956.
- Without registration no company can come into existence.
2. Separate Legal Existence - It is created by law and it is a
distinct legal entity independent of its members. It can own
property, enter into contracts, can file suits in its own name.
3. Perpetual Existence - Death, insolvency and insanity or
change of members as no effect on the life of a company. It can
come to an end only through the prescribed legal procedure.
4. Limited Liability - The liability of every member is limited
to the nominal value of the shares bought by him
- Transferability of shares – Shares are easily transferable.
5. Common Seal - It is the official signature of the company and
it is affixed on all important documents of company.

6. control - Management of company is in the hands of elected

representatives of shareholders known individually as director
and collectively as board of directors.
7. Risk bearing - The risk of losses in a company is borne by all
the share holders.

8. Formation – It is a time consuming, expensive & complicated

process. It involves preparation of several documents and
compliance with several legal requirements
 MERITS
1. Limited Liability - Limited liability of shareholder reduces the
degree of risk borne by him.
2. Transfer of Interest - Easy transferability of shares increases
the attractiveness of shares for investment.

3. Perpetual Existence - Existence of a company is not affected

by the death, insanity, Insolvency of member.
- Company can be liquidated only as per companies Act.
4. Scope for expansion - A company can collect huge amount of
capital from unlimited members to invest because of limited
liability, easy transferability and chances of high return.

5. Professional management - A company can afford to employ

highly qualified experts in different areas of business
management.
 LIMITATIONS
1. Legal formalities - Formation of Co. is very long, time
consuming, expensive and requires lot of legal formalities.
2. Lack of secrecy - It is very difficult to maintain secrecy in
case of public company, as company is required to publish
and file its annual accounts and reports.
3. Lack of Motivation - Difference between ownership and
control. Lack of personal interest as there is no direct link
between efforts and reward.
4. Delay in decision making - Red tape / bureaucracy do not
permit quick decisions and prompt actions. There is very little
scope for personal initiative.
5. Oligarchic management - Co. is said to be democratically
managed but actually managed by few people i.e. board of
directors. They might take decisions in their personal interests
and benefit, ignoring the interests of shareholders and Co.
 Private Co. Public Co.

- It has minimum 2 and maximum 200 It has minimum 7 and maximum unlimited
members. members.
- Minimum 2 director -Minimum 3 director
-- Index of members NOT compulsory -Index of members compulsory

- It cannot invite general public to buy its It invites general public to buy its shares and
shares and debentures. debentures.

- There are certain restrictions on transfer of

Its shares are freely transferable.
its shares.

- It can commence business after It can commence business after obtaining

incorporation. certificate of commencement of business.
- It has to write Private Ltd. After ts name
- Minimum capital required is one lakh. It has to write only limited after its name

Ex- Tata Sons, Citi Bank, Hyundai Motor Minimum capital required is five lakhs.
India.
Ex- Reliance Industries Ltd., Wipro Ltd. ,
a private company which is a
subsidiary of Raymond’s Ltd.
a public company is treated as public co.
 FORMATION OF A COMPANY
Formation of a company means bringing a company into
existence and starting its business. The steps involved are :
(i) Promotion (ii) Incorporation
(iii) Capital subscription (iv) Commencement of business.
• A private company has to undergo only first two steps
• A public company has to undergo all the four stages.

CHOICE OF FORM OF BUSINESS ORGANISATION

1. Cost and ease in setting up the organization: Proprietorship is
least expensive and without any legal formalities. Company is
expensive & lot of legal formalities.
2. Capital consideration: Less finance prefer proprietorship &
partnership. Huge finance company form.
3. Nature of business: If the work requires personal attention such as
tailoring / cutting, proprietorship is suitable. Large scale manufacturing
- company form will be suitable.
4. Degree of control desired: Proprietorship for full and
exclusive control than partnership or company.
5. Liability or Degree of Risk: Not very risky business can be
suitable with proprietorship / partnership whereas the risky
ventures should be done in company form.
Factor Most advantageous Least advantageous
Availability of capital Company Proprietorship
Cost of formation proprietorship Company
Ease of formation proprietorship Company
Transfer of ownership Company (except Private co) Partnership
Managerial skills Company Proprietorship
Regulations proprietorship Company
Flexibility proprietorship Company
Continuity Company Proprietorship
Liability Company Proprietorship
 NCERT QnA
1. Structure in which there is separation of ownership and management is called
(a) Sole proprietorship (b) Partnership
(c) Company (d) All business organizations
2. The karta in Joint Hindu family business has
(a) Limited liability (b) Unlimited liability
(c) No liability for debts (d) Joint liability
3. In a cooperative society the principle followed is
(a) One share one vote (b) One man one vote
(c) No vote (d) Multiple votes
4. The board of directors of a joint stock company is elected by
(a) General public (b) Government bodies
(c) Shareholders (d) Employees
5. Profits do not have to be shared. This statement refers to
(a) Partnership (b) Joint Hindu family business
(c) Sole proprietorship (d) Company
6. Capital of a company is divided into number of parts each one of is called
(a) Dividend (b) Profit
(c) Interest (d) Share
7. The Head of the joint Hindu family business is called
(a) Proprietor (b) Director
(c) Karta (d) Manager
8. Provision of residential accommodation to the members at reasonable
rates is the objective of
(a) Producer’s cooperative (b) Consumer’s cooperative
(c) Housing cooperative (d) Credit cooperative
9. 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
Short Answer Questions
1. Compare the status of a minor in a Joint Hindu family business with in a partnership
2. If registration is optional, why do partnership firms willingly go through this legal
formality and get themselves registered? Explain.
3. State the important privileges available to a private company.
4. How does a cooperative society exemplify democracy and secularism? Explain.
5. What is meant by ‘partner by estoppel’? Explain.
6. Briefly explain the following terms in brief.
(a) Perpetual succession (b) Common seal
(c) Karta (d) Artificial person
 Long Answer Questions
1. What do you understand by a sole proprietorship firm? Explain its merits
and limitation?

2. Why is partnership considered by some to be a relatively unpopular

form of business ownership? Explain the merits and limitations of it.

3. Why is it important to choose an appropriate form of organisation?

Discuss the factors that determine the choice of form of organisation.

4. Discuss the characteristics, merits and limitation of cooperative form

of organisation. Also describe briefly different types of cooperative societies.

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

6. Despite limitations of size and resources, many people continue to prefer

sole proprietorship over other forms of organisation? Why?
 Application Questions
1. In which form of organisation is a trade agreement made by one owner binding on
the others? Give reasons to support your answer.

2. The business assets of an organisation 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 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

3. Kiran is a sole proprietor. Over the past decade, her business has grown from
operating a neighborhood corner shop selling accessories such as artificial jeweler,
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 choice of form organisation?
(d) What legal formalities will she have to undergo to operate business as a company?