1st PUC Business Studies Question Bank Chapter 2 Forms of Business Organisation

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Karnataka 1st PUC Business Studies Question Bank Chapter 2 Forms of Business Organisation

1st PUC Business Studies Forms of Business Organisation Text Book Questions and Answers

Multiple Choice Questions

Question 1.
The structure in which there is separation of ownership and management is called
(a) Sole proprietorship
(b) Partnership
(c) Company
(d) All business organisations
Answer:
(c) Company

Question 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) Unlimited liability

Question 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
Answer:
(b) One man one vote

Question 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) Shareholders

Question 5.
The maximum number of partners allowed in the banking business are
(a) Twenty
(b) Ten
(c) No limit
(d) Two
Answer:
(b) Ten

Question 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) Sole proprietorship

Question 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) Share

Question 8.
The Head of the joint Hindu family business is called
(a) Proprietor
(b) Director
(c) Karta
(d) Manager
Answer:
(c) Karta

Question 9.
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
Answer:
(c) Housing cooperative

Question 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) Secret partner

Short Answer 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?
Answer:

• Grocery store
• Medical store
• Legal consultancy
• Craft centre
• Internet cafe
• Chartered accountancy firm.

Sole proprietorship will be most suitable in case of a Grocery store as in this cause initial business setting – up costs are not very high, the legal requirements are minimum and the scale of operations 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 maybe 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 oi organisation would be more suitable, and why?
Answer:

• Grocery store
• Medical clinic
• Legal consultancy
• Craft centre
• Internet cafe
• Chartered accountancy firm

A partnership form of organization would be most suitable for an 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 whereby they agree to carry out the business of the firm and share risks.

There is no compulsion with respect to the registration of the firm. In case of lack of demand closure of the firm to 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

1. Perpetual succession
2. Common seal
3. Karta
4. Artificial person

Answer:
(1) Perpetual succession – Perpetual succession means’ permanent existence as not affected by the death, retirement, insolvency or insanity of the members of a joint-stock company. A company will continue to exist even if all the members die. It can be dissolved only as per provisions of the companies act 1956.

(2) Common seal – Company being an artificial person acts through its Board of Directors. The Board of Directors enters into an agreement with others by affixing the common seal on the documents, entered. The common seal is engraved equivalent to an official signature. Any document that does not have the company seal put on it is not legally binding on the company.

(3) Karta – The Joint Hindu family business is controlled by the head of the family who is the eldest member and is called Karta. The liability of karta has unlimited. The control of business lies with karta. He takes all the decisions and is authorised to manage the business. His decisions are binding on all other members. The death of Karta will not affect the business as the next eldest member will take up the position of Karta.

(4) Artificial person – A company is a creation of law and exists independent of its members. Like natural persons, the company can own property, incur debts, borrow money, enters into contracts, sue and be sued, but unlike them, it cannot eat, ran, talk, and soon. It is, therefore, called an artificial person.

Question 4.
Compare the status of a minor in a Joint Hindu Family Business with that in a partnership firm.
Answer:
Position of minor in a Joint Hindu Family – In a Joint Hindu Family business, the inclusion of an individual into the business occurs due to birth in a Hindu undivided family. Hence, minors can also be members of the business.
The position of minor in a partnership firm to as under

Legal status of a minor: A minor is a person who has not completed the age of 18 years. A minor is not competent to enter into a valid contract. According to Partnership Act 1932, a minor cannot become a partner but he can be admitted in the firm with the consent of other partners for profit only. The liability of the die minor partner will be limited to the extent of his share of profit in the dying firm. He is not liable personally for the debts of the firm.

1. Right to share profit – A minor becomes entitled to a share in the profits of the firm.
2. Right to share the assets of the firm – If the minor has been admitted with the consent of other partners for profit, he will definitely have the right to share the assets of the firm.
3. Right to understand the books of accounts – A minor partner can inspect and take a copy of the books of accounts. A minor partner can not have access to secret books of accounts.
4. Right to file suit in the court – A minor partner cannot file a suit against the firm on its partners to get his share except when he wants to disassociate himself from the firm.

Liabilities of a minor in the firm: The liability of a minor partner’ is restricted to the amount of capital invested by him in die firm. He will not have unlimited liability like other partners.

Status of minor partner after attaining majority: After becoming a major, the minor must give a public notice to think and decide, whether he will continue to remain the partner or he will separate himself from the firm. According to the Partnership Act 1932, the minor within six months of attaining majority must inform whether he will continue to be – partner or not. If he does not intimate to the Registrar of firms about his intention, he will be assumed to have decided to continue as the partner of the firm and he will have the full rights and liabilities of the major partner.

Rights of minor after becoming a major partner:

1. Unlimited liability – After becoming the major partner, he will have to bear unlimited liability.
2. Right to share profit and assets of the firm – The major partner will continue to share the profit and assets as before. He will now also have a share of the loss if any.

Rights and liabilities after declining to become a partner:

1. He will not have the rights and liabilities of a minor partner, so far held by him.
2. He will discontinue being a part of the agreements and contracts made after the date of serving the notice.
3. He has the right to file a suit in the court for his share in the profit and assets of the firm.

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 a suit against the firm or other partners.
2. The firm cannot file a 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:
Privileges of a private company – A private company enjoys certain privileges and exemptions as compared to a public company. These privileges are as follows:
(1) Number of Members — A private company can be formed by only two members as compared to seven required by a public company.

(2) Number of Directors – A private company requires only two directors as compared to three directors in case of a public company.

(3) Exemption from Prospectus – A private company need not issue a prospectus or file a statement in lieu of prospectus with the Registrar of Companies.

(4) No Minimum Subscription – A private company can begin allotment of shares w ithout receiving the minimum subscription.

(5) Exemption from Certificate to Commence Business – A private company can commence business immediately after its incorporation as it need not procure a certificate of commencement of business from the Registrar of Companies as is required in case of a public company.

(6) Exemption from Statutory Meeting – It is not required to hold a statutory meeting or file statutory report with the Registrar of Companies.

(7) Exemption from Index of Members – It need not prepare and maintain an index of members.

(8) Exemption from Granting Loans – A private company can grant loans to other companies under the same management and can also grant loans to its directors without the approval of the Government.

(9) Exemption from Provisions Regarding Classes of Shares – A private company can issue deferred shares with disproportionate voting rights which are not allowed in the case of public companies. Moreover, it need not offer new shares to the existing shareholders whenever it – intends to increase its share capital.

(10) Exemptions regarding Directors – Private companies are also free from other restrictions imposed by the Companies Act on directors of public companies as to:

• the age limit of directors;
• the number of companies of which one person can act as a managing director;
• limit as to the period of appointment of a managing director;
• qualification shares;
• consent of Central Government for the appointment of a whole¬time director or managing director;
• limit as to the remuneration of directors;
• loans to directors;
• limit of 20 directorships that one person can accept; and
• vote by a director on a contract in which he is interested.

Because of the above exemptions, a private company is considered superior to a public company.

Question 7.
How does a cooperative Society exemplify democracy and secularism? Explain.
Answer:
The word cooperative means working together with others for a common purpose. A co-operative society is a voluntary association of persons, who join together with the motive of the 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 is open to all, irrespective of their religion, caste and gender. The co-operative society through its purpose lays emphasis on the values of mutual help and welfare. These features prove the secular nature of cooperative societies.

Question 8.
What is meant by ‘partner by estoppel’? Explain.
Answer:
Partner by Holding out or Estoppel – A person who by his words spoken or written or conduct represents himself as partner becomes liable to those who advance money to the firm on the basis of such representation. In such a case, he would be prevented from denying & his being a partner of the firm. I would be liable as a partner in that firm to anyone who has one. the faith of such representation granted credit to the firm.

Actually, such a person is not a partner in that firm – no agreement, no sharing in profits and losses, no say in the management. But as he holds himself out to be a partner, he becomes responsible to outsiders as a partner on the principle of estoppel or holding out. It is for this reason that such a person is called “partner by estoppel’ or ‘partner by holding out. Only in the eyes of the outside world, he is considered a partner.

Long Answer Questions

Question 1.
What do you understand by a sole proprietorship firm? Explain its merits and limitation?
Answer:
Definition of Sole Proprietorship:
“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.

“The sole proprietorship is the form of business organisation at the head of which stands an individual as one who is responsible, who directs its operations and who alone runs the risk of failure.” —L.H. Haney

Merits of sole Proprietorship
The main advantages of proprietorship are as follows :
(1) Easy to Start and Dissolve – A sole proprietorship can be set up easily and quickly. A person with a small amount of capital can start a business without undergoing many legal formalities. The proprietor can start business operations as and when he desires. Similarly, a sole proprietorship can be closed down very easily and quickly.

(2) Direct Motivation – The proprietor alone is entitled to receive all the profits of the business and he alone has to bear all losses. There is a direct relationship between effort and reward. This will motivate the owner of the business to work hard to achieve maximum efficiency and profitability.

(3) Quick Decisions – The sole proprietor is completely free to take decisions and to implement them. He need not consult others or seek their approval. Quick decisions and prompt actions help to improve the efficiency of business operations. The proprietor can take on-the-spot decisions and will, therefore, not let any opportunity slip away.

(4) Independent Control – The sole proprietor is the supreme judge of all activities done in the business. He enjoys complete freedom of action. No legal formalities are to be complied with and nobody can interfere in his work. The sole trader is free to change the nature and scope of his business operation, whenever the situation demands.

(5) Secrecy of Affairs – The sole trader is not required to publish his accounts. It is easy to preserve secrecy in business. Complete secrecy of business affairs provides him greater competitive strength.

(6) Personal Touch – The sole proprietor can maintain personal contacts with his customers and employees. Direct contact will enable the proprietor to know the nature of his customers and their likes and dislikes. Close contact with the customers would enhance the image of the business.

(7) Flexibility of Operations – A sole trader business is usually small in size and simple in structure. It can, therefore, be adjusted easily whenever necessary. The proprietor can easily change or modify his line of business to suit the changing conditions of the market.

(8) Economy – The management of proprietorship is inexpensive. As the proprietor himself is the manager, he can achieve greater economy in business operations. Borrowing capacity is high due to the unlimited personal liability ofthe owner.

(9) Social Importance – Sole proprietorship provides an opportunity for gainful self-employment to persons with limited money. It offers a way of earning an honourable living to those who do not want to work under others. It develops self-confidence initiative and desire for hard work among the people which is of great social importance,

Limitations Of Sole Proprietorship

Sole proprietorship suffers from the following drawbacks:
(1) Limited Capital The financial resources of a proprietor are very limited. He can either depends on his personal resources or borrowed resources. The limitation of financial resources may put hurdles in the way of the expansion of the business.

(2) Lack of Specialisation – The managerial ability of the proprietor is limited. AJ1 the qualities such as judgment, wisdom, etc. required for success in business are rarely found in one person. Moreover, the individual may not be able to perform all the managerial functions because of limitations of time, energy, skill and imagination. Sole proprietorship cannot afford to employ professional experts. As a result, the benefits of division of labour are not available which lacks specialisation and its benefits.

(3) Limited Resources – Sole proprietorship is owned by an individual, so the resources accumulated by one person are limited and scarce as compared to the capita) of partnership and company, where capital is contributed by many partners and shareholders respectively.

(4) Limited Managerial Efficiency – The proprietor being an individual cannot be the master of all die branches of the business. He cannot be the expert of purchase, sales, accounts, production and marketing etc. As such sole trade suffers from limited managerial efficiency.

(5) Unlimited Liability – The liability of the individual owner is unlimited in the sense that business creditors can even recover their debts from the personal assets of the proprietor.

(6) Hasty Decision – The sole trader being the wholesale incharge of the business takes immediate decision. The chances of making unsound decisions are quite high in such business. Consequently, the firm has to suffer.

(7) Uncertain Existence – The entire sole proprietorship centres around an individual, so any misshaping with the owner of the business such as illness, absence due to social customs and death adversely affects the business and sometimes them is dissolved.

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 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.” Some people consider partnership to be relatively unpopular because the inherent features of partnership such as Joint risk bearing and pro fit 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 is a form of business organization actually has both merits and limitations as dismissed below Merits
(i) Ease of formation and closure:
A partnership firm can be formed easily by putting an agreement between the prospective partners into place whereby they agree to carryout the business of the firm and share risks. There is no compulsion with respect to registration of the firm. Closure of the firm too is an easy task.

(ii) Balanced decision making:
The partners can oversee different functions according to their areas of expertise. Because an individual is not forced to handle different activities, this not only reduces the burden ofwork but also leads to fewer errors in judgements. As a consequence, decisions are likely to be more balanced.

(iii) More funds:
In a partnership, the capital is contributed by a number of partners. This makes it possible to raise larger amount of funds as compared to a sole proprietor and undertake additional operations when needed.

(iv) Sharing of risks:
The risks involved in running a partnership firm are shared by all the partners. This reduces the anxiety, burden and stress on individual partners.

(v) Secrecy:
A partnership firm is not legally required to publish its accounts and submit its reports. Hence it is able to maintain the confidentiality of information relating to its operations.

Limitations:
A partnership firm of the business organisation suffers from the following:
(I) Unlimited liability:
Partners are liable to repay debts even from their personal resources in case the business assets are not sufficient to meet its debts. The liability of partners is both joint and several which may prove to be a drawback for those partners who have greater personal wealth. They will have to repay the entire debt in case the other partners are unable to do so.

(II) Limited resources:
There is a restriction on the number of partners, and hence contribution in terms of capital investment is usually not sufficient to support large-scale business operations. As a result, partnership firms face problems in expansion beyond a certain size.

(III) Possibility of conflicts:
The partnership is run by a group of persons wherein decision-making authority is shared. Differences in opinion on some issues may lead to disputes between partners. Further, the decisions of one partner are binding on other partners.

Thus an unwise decision by someone may result in financial ruin for all others. In case a partner desires to leave the firm, this can result in termination of partnership as there is a restriction on transfer of ownership.

(IV) Lack of continuity:
The partnership comes to an end with the death, retirement, insolvency or lunacy of any partner. It may result in a lack of continuity. However, the remaining partners can enter into a fresh agreement and continue to run the business.

(V) Lack of public confidence:
A partnership firm is not legally required to publish its financial reports or make other related information public. It is, therefore, difficult for any member of the public to ascertain the true financial status of a partnership firm. As a result, the confidence of the public in partnership firms is generally low.

Question 3.
Why is it important to choose an appropriate form of organisation? Discuss the factors that determine the choice of the form of organisation.
Answer:
Choke of a form of business enterprise – A business firm can be owned and managed in several forms. Therefore, a businessman has to choose the most appropriate form of business enterprise for his business. Choice of the form of business is a very crucial decision because it letennines the risk, responsibility, liability, and control of the enterprise and the division of profit or loss.

Once a form of business Is chosen it is difficult and costly to switch ever to another form of organization. [Hence, the form of ownership should be chosen after considering the various factors.

Several factors influence the choice of the form of business enterprise. These factors are given below:

1. Nature of business – service, trade, manufacturing.
2. Scale of operations – volume of business (large. medium, small) and size of the market area (local, national, international) served.
3. Degree of direct control desired by the owners.
4. Amount of capital required initially and for expansion.
5. Degree of risk and liability and the willingness of owners to assume personal liability for debts of the business.
6. Division of profits among the owners.
7. Light of life desired among the owners.
8. Relative freedom from government regulations (flexibility of operations).
9. Scope and plan of internal organisation.

(1) Nature of Business – The entrepreneur has to decide about the kind of business activity he is going to undertake, namely, trading activity, manufacturing activity or service activity, etc. Business activities requiring pooling of skills and funds, e.g. wholesale trade, accounting firms, tax consultants, stockbrokers, etc. are better organized as partnerships. Manufacturing organisations of large size are more commonly set up as private and public companies.

(2) Size and Area of Operations -Large-scale enterprises catering to national and international markets can be organised more successfully as private or public companies. The reason is that large-sized enterprises require large financial and managerial resources which are beyond the capacity of a single person or a few partners.

On the other hand, small and medium scale firms are generally set up as a partnership and sole- proprietorship. Where the area of operations is widespread (national or international), company ownership is appropriate. But if the area of operations is confined to a particular locality, sole proprietorship or partnership will be a more suitable choice.

(3) Degree of C6ntrol Desired – If a person aims at having direct control over his business operations, the preferable firm would be a sole proprietorship. In case of the owner is not interested in direct personal control but in a large-scale operation, it would be desirable to adopt the company form of ownership.

(4) Amount of Capital Required — The funds required for the establishment and operation of a business have an important impact on tile choice. When the finance required to start the business is quite huge, then the company form of organization is more suitable. Where the funds required initially are small and the scope for expansion is not desired, sole-proprietorship or partnership is a better choice.

(5) Degree of Risk and Liability – The volume of risk and the willingness of owners to bear the risk is an important consideration. A sole proprietorship may have large financial resources sufficient for a medium-scale enterprise but due to unlimited personal liability, he may not like to organise as a proprietorship or a partnership. Due to limited liability and a large number of shareholders, there is maximum diffusion of risk in a public company.

(6) Division of Surplus – A sole trader receives all the profits of his business but he also bears all the risks. If a person is ready to bear the unlimited personal liability and desires maximum share of profits, proprietorship and partnership are preferable to the company form of organisation.

(7) Duration of Business – If the entrepreneur wishes the business to continue on a temporary or small scale he may start as a sole proprietorship or a partnership firm. Enterprises of a permanent nature can be better organised as joint-stock companies and co-operatives because they enjoy perpetual succession. A business requiring a long period for establishment and constitution should be organised as a corporate body.

(8) Government Regulation and Control – If the businessman wishes the business free from too much government control and regulations, he would prefer sole trading or partnership. Companies and co-operatives are, on the other hand, subject to several restrictions and have to undergo several legal formalities. But this factor is not very important and it can be helpful in making the choice only when other factors are unable to indicate a clear-outside.

(9) Managerial Requirements-Organisational and administrative and distribution can be managed effectively as sole-proprietorships and partnerships. On the other hand, giant enterprises involving the use of complex techniques and procedures require professional management.

Such enterprises can be managed efficiently only as joint-stock companies. In order to maintain, complete autonomy and control over the affairs of business sole-proprietorships and partnerships are suitable.

(10) Flexibility of Operations – Businesses which require a high degree of administrative flexibility should better be organised as sole proprietorships or partnerships. The flexibility of operations is linked with the internal organisation of a business. The internal organisation of sole ‘ proprietorship and partnership is much more simple and less elaborate than the internal organisation of a joint-stock company. Moreover, the legal formalities.

The above analysis indicates that the basic consideration in the choice of a form of ownership is the nature and size of business; all other factors are dependent on it The scope and plan of organisation will also vary with the sizes and nature of business.

It must be noted that these factors are interrelated and interdependent. Therefore, an entrepreneur Should not consider these factors in isolation. The interrelationship between these factors should be duly considered.

Question 4.
Discuss the characteristics, merits, and limitations of the cooperative form of organisation. Also, describe briefly different types of cooperative societies.
Answer:
According to The Indian Co-operative Societies Act, 1912, “Co-operative organization is a society which has its objectives for the promotion of economic interests of its members in accordance with co-operative principles”.
Features:
The characteristics of a cooperative society are listed below.
(i) Voluntary membership:
The membership of a cooperative society is voluntary. A person is free to join a cooperative society, and can also leave anytime as per his desire. There cannot be any compulsion for him to join or quit a society. Although procedurally a member is required to serve a notice before leaving the society, there is no compulsion to remain a member. Membership is open to all, irrespective of their religion, caste, and gender.

(ii) Legal status:
Registration of a cooperative society is compulsory. This accords a separate identity to the society which is distinct from its members. Thnsoriety 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.

(iii) Limited liability:
The liability of the members of a cooperative 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.

(iv) Control:
In a cooperative 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 lends the cooperative society a democratic character. ,

(v) Service motive:
The cooperative society through its purpose lays emphasis on the values of mutual help and welfare. Hence, the motive of service dominates its work. If any surplus is generated as a result of its operations, it is distributed amongst the members as a dividend in conformity with the bye-laws of the society.

Merits:
The cooperative society offers many benefits to its members. Some of the advantages of the cooperative form of organisation are as follows.
(I) Equality in voting status:
The principle of one man one vote’ governs the cooperative society. Irrespective of the amount of capital contribution by a member, each member is entitled to equal voting rights.

(II) Limited liability:
The liability of members of a cooperative society is limited to the extent of their capital contribution. The personal assets of the members are, therefore, safe from being used to repay business debts.

(III) Stable existence:
Death, bankruptcy, or insanity of the members do not affect the continuity of a cooperative society. A society, therefore, operates unaffected by any change in the membership.

(IV) Economy in operations:
The members generally offer honorary services to society. As the focus is on the elimination of middlemen, this helps in reducing costs. The customers or producers themselves are members of society, and hence the risk of bad debts is lower.

(V) Support from the government:
The cooperative society exemplifies the idea of democracy and hence finds support from the Government in the form of low taxes, subsidies, and low-interest rates on loans.

(VI) Ease of formation:
The cooperative society can be started with a minimum of ten members. The registration procedure is simple involving a few legal formalities. Its formation is governed by the provisions of the cooperative Societies Act 1912.

Limitations:
The cooperative form of organisation suffers from the following limitations:
(A) Limited resources:
Resources of a cooperative society consist of capital contributions of the members with limited means. The low rate of dividend offered on investment also acts as a deterrent in attracting membership or more capital from the members.

(B) Inefficiency in management:
Cooperative societies are unable to attract and employ expert managers because of their inability to pay them high salaries. The members who offer honorary services on a voluntary basis are generally not professionally equipped to handle the management functions effectively.

(C) Lack of secrecy:
As a result of open discussions in the meetings of members as well as disclosure obligations as per the Societies Act (7), it is difficult to maintain secrecy about the operations of a cooperative society.

(D) Government control:
In return for the privileges offered by the government, cooperative societies have to comply with several rules and regulations related to auditing of accounts, submission of accounts, etc. Interference in the functioning of the cooperative organisation through the control exercised by the state cooperative departments also negatively affects its freedom of operation.

Internal quarrels arising as a result of contrary viewpoints may lead to difficulties in decision-making. Personal interests may start to dominate the welfare motive and the benefit of other members may take a backseat if the personal gain is given preference by certain members.

The main types of cooperative societies are given below:
1. Consumers cooperative societies:
Consumers’ cooperatives are formed by the consumers to obtain their daily requirements at reasonable prices. Such a society buys goods directly from manufacturers and wholesalers to eliminate the profits of middlemen.

These societies protect lower and middle-class people from the exploitation of profit-hungry businessmen. The profits of the society are distributed among members in the ratio of purchases made by them during the year.

2. Producers cooperatives:
Producers or industrial cooperatives are voluntary associations of small producers and artisans who join hands to face competition and increase production. These societies are of two types.

(a) Industrial service cooperatives:
In this type, the producers work independently and sell their industrial output to the cooperative society. The society undertakes to supply raw materials, tools, and machinery to the members. The output of members is marketed by society.

(b) Manufacturing cooperatives:
In this type, producer members are treated as employees of the society and are paid wages for their work. Society provides raw materials and equipment to every member.

3. Marketing Cooperatives:
Marketing societies are set up generally by farmers, artisans, and small producers who find it difficult to face competition in the market and to perform necessary marketing functions individually. These are voluntary associations of independent producers who want to sell their output at remunerative prices.

The output of different members is pooled and sold through a centralised agency to eliminate middlemen. The sale proceeds are distributed among the members in the ratio of their outputs.

4. Cooperative Farming Societies:
These are voluntary associations of small farmers who join together to obtain the economies of large-scale farming. In India, farmers are economically weak and their land-holdings are small. In their individual capacity, they are unable to use modem tools, seeds, fertilizers, etc. They pool their lands and do farming collectively with the help of modem technology to maximize agricultural output.

5. Housing Cooperatives:
These societies are formed by low and middle-income group people in urban areas to have a house of their own. Housing cooperatives are of different types. Some societies acquire land and give the plots to the members for constructing their own houses.

6. Credit Cooperatives:
These societies are formed by poor people to provide financial help and to develop the habit of savings among members. They help to protect members from the exploitation of money lenders who charge exorbitant interest from borrowers.

Credit cooperatives are found in both urban and rural areas. In rural areas, agricultural credit societies provide loans to members mainly for agricultural activities. In urban areas, non-agricultural societies or urban banks offer credit facilities to the members for household needs.

Question 5.
Distinguish between a Joint Hindu family business and a partnership.
Answer:

Question 6.
Despite limitations of size and resources, many people continue to prefer sole proprietorship over other forms of organisation? Why?
Answer:
Survival of Sole Proprietorship – The sole proprietorship has several limitations and drawbacks. But still, this form of organisation is very popular. This is because of the several advantages of sole proprietorship which are not available in the case of a partnership firm or a company. To quote W.R. Basset,

“The one-man control is the best in the world if that one man is big enough to manage everything.” Sole tradership facilitates one-man control. It enjoys many benefits like ease of formation, flexibility, quick decision-making secrecy, and personal touch with customers.

A sole proprietorship also suffers from various drawbacks. The financial resources are limited and lack specialized management. These limitations keep the scale of business operations very small as compared to partnership firms and joint-stock companies.

The sole tradership concern sinks and swims with its owing. The proprietor, who manages everything related to the business, may not have complete knowledge and skills which are required for the efficient running of the business. His ill health will also tell upon the working of the business. Thus, on many occasions, the business operations are beyond the capacity of one individual. He has to take the help of other
people who can share business risks and contribute capital and managerial skills for running the enterprise.

Suitability – Thus, sole proprietorship has several advantages and disadvantages. According to William R. Basset, “the one-man control is the best in the world if that man is big enough to manage everything.”But, one-man can rarely manage and control everything. Therefore, a sole proprietorship is a suitable form of organisation in the following case’s:

• Where the market is local, e.g. small-scale retailers
• Where personal attention to the needs and preferences of customers is essential, e.g. carpeting, beauty parlours, etc.;
• Where fashions change very frequently, e.g. artistic jewelry;
• Where a small amount of capital is required but personal skills are more important, e.g. health clinic;
• Where quick decisions and prompt action are necessary, e.g. stockbrokers.
• Where risk involved is negligible, e.g. doctors, lawyers, chartered accountants.

Application 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 the partnership form of organization, 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 any one of them acting for all,” The definition of partnership highlights the fact that it is a business carried on by all or any one 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 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 the business and as such are liable to that extent. The partners share amongst themselves the responsibility of decision-making and control of day-to-day activities.

Question 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

1. The organisation is a sole proprietorship firm.
2. The organisation is a partnership firm with Anthony and Akbar as partners. Which of the two partners can the creditor’s approach for repayment of the debt? Explain giving reasons.

Answer:
1. The organization is a sole proprietorship firm:
Sole proprietors have unlimited liability. This implies that the owner is personally responsible for the 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 Rs. 80,000 but the organizational assets amount to Rs.50,000 only. In such a situation, the creditors can demand from the proprietor to pay Rs.30,000 from his/her personal sources even if he/she has to sell his/her personal property to repay the firm’s debts.

2. The organization 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 Rs.80,000 but the organizational assets amount to Rs.50,000 only, the creditors can demand from both or any of the partners Anthony and Akbar to pay Rs.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 liable for payment of debts and they contribute in proportion to their share in the 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 in liability defined 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 countrywide.

1. Explain two benefits of remaining a sole proprietor
2. Explain two benefits of converting to a joint-stock company
3. What role will her decision to go nationwide play in her choice of form of the organisation?
4. What legal formalities will she have to undergo to operate a business as a company?

Answer:
1. Kiran may have the following two benefits of remaining a sole proprietor.

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

2. Kiran may have the following two benefits of converting to a Joint Stock Company.

• She will be able to acquire the funds required for the expansion of her retail chain branches countrywide through share capital in a Joint Stock Company.
• The public has more faith in a Joint Stock Company than in a sole proprietorship firm which will help in increasing the customer base for Kiran’s business.

3. Her decision to go nationwide involves an increase in her scale of operation, requirement of capital and management abilities. As a sole 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 situations especially when there are complexities of a 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 play a role in her choice of the form of organization and she will have much stronger reasons to form a Joint Stock Company in this case.

4. The formation of a company requires greater time, effort and extensive knowledge ot legal requirements and the procedures involved, To operate her business as a company, first of all, Kir an will ahve to prepare several documents and will have in ensure compliance with several legal requirements 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 – tune which Kiran will have to provide.

The functioning of a compnay is subject to many legal provisions and compulsions A compnay 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 a registrar. SEBI, etc.

1st PUC Business Studies Forms of Business Organisation Additional Questions and Answers

One Mark Questions

Question 1.
Write any one type of form of business organisations.
Answer:
Partnership firm

Question 2.
Give the meaning of sole trading concern.
Answer:
Sole trading concern refers to a form of business organisation which is owned, managed and controlled by an individual who is the recipient of ail profit bearer of all risks.

Question 3.
Give any one example to sole trading concern.
Answer:
Home Healthcare

Question 4.
Who is Karta?
Answer:
The head of the Hindu Joint Family also called the Karta.

Question 5.
State the minimum & maximum members in partnership.
Answer:
Minimum Number of members is 2 and the maximum is 10 in case, of banking and 20 in case of business.

Question 6.
Write any one effect of non-registration of a partnership
Answer:
No suit by a partner against other partners or firm.

Question 7.
Write any one type of partnership firm.
Answer:
Limited Partnerships

Question 8.
Give the meaning of co-operative society.
Answer:
A co-operative society is a voluntary association of persons, who join together with the motive of welfare.

Question 9.
State the minimum and maximum members required for the formation of a co-operative society.
Answer:
Minimum of 5 and maximum is unlimited.

Question 10.
Name any one type of co-operative society.
Answer:
Consumer co-operative society

Question 11.
State the liability of a sole trader.
Answer:
Unlimited liability

Question 12.
State the liability of Karta.
Answer:
Unlimited liability

Question 13.
Which act governs the partnership firms in India?
Answer:
Indian Partnership Act 1932

Question 14.
Which act governs the co-operative societies in India?
Answer:
Co-operative Societies Act, 1912

Question 15.
State the liability of members of co-operative societies.
Answer:
Limited liability

Question 16.
State the voting principles in co-operative societies.
Answer:
One man one vote.

Question 17.
State the main objectives of co-operative societies.
Answer:
Enhanced cooperation

Question 18.
State the liability of co-parceners.
Answer:
The liability of coparceners is always limited in nature.

Question 19.
Who is a minor partner?
Answer:
A partner who has not attained the age of 18 years is called a minor partner.

Question 20.
Is registration of partnership compulsory?
Answer:
As per the Indian partnership Act 1932, it is not compulsory for registration of partnership.

Two marks Questions

Question 1.
Write any two features of sole trading concern.
Answer:

• Unlimited liability.
• Freedom in Selection of Business.

Question 2.
Give the meaning of HUF.
Answer:
It refers to a form of organisation wherein the business is owned and carried by the members of the Hindu undivided family.

Question 3.
Who are co-parceners?
Answer:
A coparcener is a person who acquires a right in the ancestral property by birth and a person who has a right to demand partition in the HUF property.

Question 4.
Define Partnership.
Answer:
According to the Indian partnership Act 1932, Partnership as “the relation between persons who have agreed to share the profit of the business carried on by all or any one of them acting for all”.

Question 5.
What is a Partnership deed?
Answer:
When the partnership agreement is written and signed by all the partners and is duly stamped according to the stamp act, it is called a partnership deed.

Question 6.
Who is an active partner?
Answer:
A partner who takes care of day to day activities of the business is called an active partner.

Question 7.
What is a particular partnership?
Answer:
The partnership formed for the accomplishment of a particular project says construction of a building or an activity to be carried on for a specified time period is called a particular partnership.

Question 8.
Write any two features of co-operative societies?
Answer:

• Voluntary Membership
• Limited Liability

Question 9.
What is a credit Cooperative society?
Answer:
Credit co-operative societies are established for providing easy credit on reasonable terms to the members. The members comprise persons who seek financial help in the form of loans.

Question 10.
What is an unlimited liability?
Answer:
Unlimited liability means that the owners of a business are liable for the entire amount of debt and obligations of that business.

Question 11.
What are housing co-operative societies?
Answer:
Housing co-operative societies are established to help people with limited income to construct houses at reasonable costs.

Question 12.
What are consumer’s co-operative societies?
Answer:
Consumers’ co-operative societies are formed to protect the interests of consumers. The members comprise consumers desirous of obtaining good quality products at reasonable prices.

Question 13.
What are producer’s co-operative societies?
Answer:
These societies are set up to protect the interest of small producers. The members comprise producers desirous of procuring inputs for the production of goods to meet the demands of consumers.

Question 14.
What do you mean by the partnership at will?
Answer:
Partnership at will means a partnership in which the partners have not agreed to remain partners until the expiration of a. definite term or the completion of a particular undertaking.

Question 15.
What is a limited partnership?
Answer:
In a limited partnership, the liability of at least one partner is unlimited whereas the rest may have limited liability. Such a partnership does not get terminated with the death, lunacy, or insolvency of limited partners.

Question 16.
Who is your partner?
Answer:
A person who takes part in an undertaking with another or others, especially in a business or firm with shared risks and profits is called a partner.

Question 17.
State -any two contents of partnership deed.
Answer:

1. Name of the firm
2. Name and address of the partner

Five Marks Questions

Question 1.
Explain the Demerits of Sole Trading Concern
Answer:
(a) Limited Capital:
It is often difficult for a single individual to raise a huge amount of capital. In a sole proprietorship business, it is the owner who arranges the required capital of the business. The owner’s own funds, as well as borrowed funds, sometimes become insufficient to meet s the requirement of the business for its growth and expansion.

(b) Unlimited Liability:
In case the sole proprietor fails to pay the business obligations and debts arising out of business activities, his personal properties may have to be used to meet those liabilities. This restricts the sole proprietor from taking risks and he thinks cautiously while deciding to start or expand the business activities.

(c) Lack of Continuity:
The existence of a sole proprietorship business is linked to the life of the proprietor. Illness, death or insolvency of the owner brings an end to the business. The continuity of business operation is therefore uncertain.

(d) Limited Size:
Insole proprietorship form of business organisation there is a limit beyond which it becomes difficult to expand its activities. It is not always possible for a single person to supervise and manage the affairs of the business if it grows beyond a certain limit.

(e) Lack of Managerial Expertise:
A sole proprietor may not be an expert in every aspect of management. He/she may be an expert in administration, planning, etc., but maybe poor in marketing. Again, because of limited financial resources, it is also not possible to employ a professional manager. Thus, the business lacks the benefits of professional management.

Question 2.
Briefly explain the features of Sole Trading
Answer:
1. Single Ownership:
A single individual always owns sole proprietorship form of business organization. That individual owns all assets and properties of the business. Consequently, he alone bears all the risk of the business. Thus, the business of the sole proprietor comes to an end at the will of the owner or upon his death.

2. No sharing of Profit and Loss:
The entire profit arising out of the sole proprietorship business goes to the sole proprietor. If there is any loss it is also to be borne by the sole proprietor alone. Nobody else shares the profit and loss of the business with the sole proprietor.

3. One man’s Capital:
The capital required by a sole proprietorship form of business organisation is totally arranged by the sole proprietor. He provides it either from his personal resources or by borrowing from friends, relatives, banks or other financial institutions.

4. One-man Control:
The controlling power in a sole proprietorship business always remains with the owner. The owner or proprietor alone takes all the decisions to run the business. Of course, he is free to consult anybody as per his liking.

5. Unlimited Liability:
The liability of the sole proprietor is unlimited. This implies that in case of loss the business assets along with the personal properties of the proprietor shall be used to pay the business liabilities.

Question 3.
What are the different types of Partnership Firms?
Answer:
(a) General Partnership:
A general partnership is a partnership with only general partners. Each general partner takes part in the management of the business, and also takes responsibility for the liabilities of the business. If one partner is sued, all partners are held liable. General partnerships are the least desirable for this reason.

(b) Limited Liability Partnerships:
A limited liability partnership (LLP) is different from a limited partnership or a general partnership but is closer to a limited liability company (LLC). In the LLP, all partners have limited liability.

(c) Particular partnership:
When a partnership is formed for the object of conducting a particular business, it is called a particular partnership. The particular undertaking cannot be extended to any other enterprise and this would last only so long as the business id not completed.

(d) Partnership at will:
This type of partnership is defined by the partnership Act 1932: “Where no provision is made by contract between the partner for the duration of their partnership or for the termination of the partnership. Partnership at will can be dissolved by any partner serving notice in waiting to other partners of his intention to do so.

(e) Partnership of fixed term:
The organization, which is formed for a definite period of time, is called a partnership for a fixed term. At the expiry of this period, the partnership comes to an end unless the partners have made a contract to the contrary. If the business is continued after the expiry period, the new partnership will become a partnership at will.

Question 4.
What is the procedure to register a Partnership?
Answer:
A partnership firm can be registered whether at the time of its formation or even subsequently. You need to file an application with the Registrar of Firms of the area in which your business is located.
Application for partnership registration should include the following information:

1. Name of your firm
2. Name of the place where the business is carried on
3. Names of any-other pkfcc where the business is carried on
4. Date of partners joining the firm
5. Full name and permanent address of partners.
6. Duration of the firm

Every partner needs to verify and sign the application. Ensure that the following documents and prescribed fees are enclosed with the registration application:

• Application for Registration in the prescribed Form – 1
• Duly filled Specimen of Affidavit
• Certified copy of the Partnership deed
• Proof of ownership of the place of business or the rental lease agreement

Question 5.
Briefly explain the limitations of Cooperative Societies
Answer:
1. Limited Capital:
The amount of capital that a cooperative society can raise from its member is very limited because the membership is generally confined to a particular section of the society. Again due to the low rate of return the members do not invest more capital Government’s assistance is often inadequate for most co-operative societies.

2. Managerial problems:
Generally, it is seen that co-operative society does not function efficiently due to a lack of managerial talent. The members or their elected representatives are not experienced enough to manage the society. Again, because of limited capital, they are not able to get the benefits of professional management.

3. Lack of Motivation:
Every co-operative society is formed to render service to its members rather than to earn a profit. This does not provide enough motivation to the members to put in their best effort and manage the society efficiently.

4. Lack of Co-operation:
The co-operative societies are formed with the idea of mutual co-operation. But it is often seen that there is a lot of friction between the members because of personality differences, ego clashes, etc. The selfish attitude of members may sometimes bring an end to society.

5. Dependence on Government:
The inadequacy of capital and various other limitations make cooperative societies dependent on the government for support and patronage in terms of grants, loan subsidies, etc. Due to this, the government sometimes directly interferes in the management of the society and also audits their annual accounts.

Question 6.
What are the characteristic features of a Partnership firm?
Answer:
1. Two or more Members:
At least two members are required to start a partnership business. But the number of members should not exceed 10 in the case of banking business and 20 in the case of other business. If the number of members exceeds this maximum limit then that business cannot be termed as partnership business.

2. Agreement:
Whenever you think of joining hands with others to start a partnership business, f”^ of all, there must be an agreement between all of you.

3. Lawful Business:
The partners should always join hands to carry on any kind of lawful business. To indulge in smuggling, black marketing, etc., cannot be called partnership business in the eye of the law. Again, doing social or philanthropic work is not termed as partnership business.

4. Competence of Partners:
Since individuals join hands to become partners, it is necessary that they must be competent to enter into a partnership contract. Thus, minors, lunatics, and insolvent persons are not eligible to become partners. However, a minor can be admitted to the benefits of partnership i.e., he can have a share in the profits only.

5. Sharing of Profit:
The main objective of every partnership firm is sharing of profits of the business amongst the partners in the agreed proportion. In the absence of any agreement for profit sharing, it should be shared equally among the partners

Question 7.
What are the contents of a Partnership Agreement?
Answer:
Agreement contains:

1. The amount of capital contributed by each partner.
2. Profit or loss sharing ratio.
3. Salary or commission payable to the partner, if any
4. Duration of business, if any
5. Name and address of the partners and the firm.
6. Duties and powers of each partner.
7. Nature and place of business.
8. Any other terms and conditions to run the business.

Question 8.
What are the effects of Non-Registration for a partnership firm?
Answer:
Consequences of Non-Registration: An unregistered partnership firm suffers from the following limitations:

1. It cannot enforce its claims against the third party in a court of law.
2. It cannot claim adjustment for any sum exceeding Rs. 100.
3. It cannot file a legal suit against any of its partners.
4. Partners of an unregistered firm cannot file any suit to enforce a right against the firm.
5. A partner of an unregistered firm cannot file a suit against other partners. Non¬registration of a firm, however

Question 9.
Briefly explain the features of a Cooperative Society.
Answer:
(a) Voluntary Association:
Members join the co-operative society voluntarily, that is, by choice. A member can join the society as and when he likes, continue for as long as he likes, and leave the society at will.

(b) Open membership:
The membership of a Co-operative Society is open to all those who have a common interest. A minimum of ten members is required to form a cooperative society. The Co¬operative society Act does not specify the maximum number of members for any co¬operative society. However, after the formation of the society, the member may specify the maximum number of members.

(c) State control:
To protect the interest of members, co-operative societies are placed under state control through registration. While getting registered, a society has to submit details about the members and the business it is to undertake. It has to maintain books of accounts, which are to be audited by government auditors.

(d) Sources of Finance:
In a co-operative society, capital is contributed by all the members. However, it can easily raise loans and secure grants from the government after its registration.

(e) Democratic Management:
Co-operative societies are managed on democratic lines. The society is managed by a group known as the “Board of Directors”. The members of the board of directors are the elected representatives of the society. Each member has a single vote, irrespective of the number of shares held. For example, in a village credit society, the small farmer having one share has equal voting right as that of a landlord having 20 shares.

Question 10.
Explain five merits of the partnership firm.
Answer:
1. Ease of formation:
The partnership is simple to form, inexpensive to establish, and easy to operate. No legal formalities are involved and no formal documents are to be prepared. Only an agreement is required. Even the registration of the firm is not compulsory. Similarly, a partnership can be dissolved easily at any time.

2. Larger financial resources:
It is possible to collect a large amount of capital due to a number of partners. New partners can be admitted to raise further capital whenever necessary. Credit-worthiness is also high because every partner is jointly and severally liable for all the debts of the firm.

3. Combined abilities and judgment:
The skill and experience of all the partners are pooled together. The combined judgment of several persons helps reduce errors of judgment. The partners may be assigned duties according to their talent. Therefore, benefits of specialization are available. Partners meet frequently and can take prompt decisions.

4. Direct motivation:
Ownership and management of the business are vested in the same persons. There is a direct relationship between effort and reward. Every partner is motivated to work hard and to ensure the success of the firm.

5. Close supervision:
Every partner is expected to take a personal interest in the affairs of the business. Different partners can maintain personal contact with employees and customers. Fears of unlimited liability make the partners cautious and avoid reckless dealings. Management of partnership is cheaper when expert managers are not employed.

6. Flexibility of operations:
Partnership business is free from legal restrictions and government control. Partners can make changes in the size of business, capital and managerial structure without any approval. The activities of partnership business can be adapted easily to changing conditions in the market.

Question 11.
Explain five demerits of a partnership firm.
Answer:
1. Unlimited liability:
Every partner is jointly and severally liable for the entire debt of the firm. He has to suffer not only for his own mistakes but also for the lapses and dishonesty of other partners. This may curb entrepreneurial spirit as partners may hesitate to venture into new lines of business for fear of losses. The private property of partners is not safe against the risks of a business.

2. Limited resources:
The amount of financial resources in partnership is limited to the contributions made by the partners. The number of partners cannot exceed 10 in the banking business and 20 in other types of businesses.

3. Risk of implied agency:
The acts of a partner are binding on the firm as well as on other partners. An incompetent or dishonest partner may bring disaster for all due to his acts of omission or commission

4. Lack of harmony:
The success of a partnership depends upon mutual understanding and cooperation among the partners. Continued disagreement and bickering among the partners may paralyze the business or may result in its untimely death.

5. Lack of continuity:
A partnership comes to an end with the retirement, incapacity, insolvency, and death of a partner. The firm may be carried on by the remaining partners by admitting a new partner. But it is not always possible to replace a partner enjoying trust and confidence of all. Therefore, the life of a partnership firm is uncertain, though it has a longer life than a sole proprietorship.

6. Non-transferability of interest:
No partner can transfer his share in the firm to an outsider without the unanimous consent of all the partners. This makes investment in a partnership firm non-liquid and fixed. An individual’s capital is blocked.

Ten Marks Questions

Question 1.
Briefly explain the different types of Partners
Answer:
1. Active Partner:
A partner who takes an active part in the management of the business is called an active partner. He may also be called an ‘actual’ or ‘ostensible’ partner. He is an agent of the other partners in the ordinary course of business of the firm and considered a full-fledged partner in the real sense of the term.

2. Sleeping or Dormant Partner:
A sleeping or dormant partner is one who does not take any active part in the management of the business. He contributes capital and shares the profits which are usually less than that of the active partners. He is liable for all the de of the firm but his relationship with the firm is not disclosed to the general public.

3. Nominal Partner:
A partner who simply lends his name to the firm is called a nominal partner. He neither contributes any capital nor shares in the profits or take part the management of the business. But he is liable to third parties like other partners.

A nominal partner must be distinguished from the sleeping partner. While the nominal partner is known to the outsiders and does not share in the profits, the sleeping partner shares in the profit as his relationship is kept secret.

4. Partner in Profits:
A partner who shares in the profits only without being liable of the losses is known as partner in profits. He does not take part in the management of the business but he is liable to third parties for all the debts of the firm.

5. Minor Partner:
Partnership arises from contract and a minor is not competent to enter into contract. Therefore, strictly speaking, a minor cannot be a full -fledged partner. But with the consent of all the partners he can be admitted into partnership for benefits only.

He is not personally liable to third parties for the debts of the firm, on attaining majority, if he continues as a partner, his liability will become unlimited with effect from the date of hi original admission into the firm.

6. Partner by estoppels:
If a person falsely represents himself as a partner of any firm or behaves in a way that somebody can have an impression that such person is a partner and on the basis of this impression transacts with that firm then that person is held liable to the third party. The person who falsely represents himself as a partner is known as a partner by estoppels

7. Partner by holding out:
A person who by conduct or words represents, or allows him/herself to be represented, as a partner in a firm is bable for the credit or loans obtained by firm on the basis of such representation are called as Partner by Holding out.

8. Sub Partner:
A person who shares the profits of a particular partner of the firm is called a sub partner. There will be an agreement between the partner and sub-partner which is not binding on the firm. The sub-partner is not accountable to the firm as it is a private arrangement between a partner and sub-partner.

Question 2.
What do you mean by Partnership Deed? Briefly explain Its Contents.
Answer:
A partnership is a voluntary association of people who come together to achieve a common objective. In order to enter a partnership, a clear agreement with terms and conditions relating to the business and the partners is essential to avoid any misunderstanding.

This agreement can be written or oral. Even though it isn’t mandatory to have a written agreement as it constitutes as evidence in case of disputes. These written terms and conditions or guidelines that govern the partnership are called a partnership deed.

The deed contains the following:

1. Name of the firm
2. Names, addresses, occupation of partners
3. Amount of capital contributed by partners
4. Ratio of sharing profits and losses
5. Nature of the business to be carried on
6. Duration of the agreed partnership
7. Amount of drawings that can be made by each partner
8. Rate of interest on capital payable to partners
9. Salary, Commission or Bonus payable to partners
10. Division of work among partners
11. Accounts maintenance
12. Rights, duties and obligations of partners
13. Introduction of additional capital by partners
14. Arbitration clause for settling disputes

Question 3.
Briefly explain the Advantages and Disadvantages of Sole Proprietorship
Answer:
The sole proprietorship form of business is the most simple and common in our country.
It has the following advantages:
(a) Easy to Form and Wind up:
A sole proprietorship form of business is very easy to form. With a very small amount of capital, you can start a business. There is no need to comply with any legal formalities except for those businesses which required license from local authorities or health department of government. Just like formation, it is also very easy to wind up the business. It is your sole discretion to form or wind up the business at any time.

(b) Direct Motivation:
The profits earned belong to the sole proprietor alone and he bears the risk of losses as well. Thus, there is a direct link between effort and reward. If he works hard, then there is a possibility of getting more profit and of course, he will be the sole beneficiary of this profit. Nobody will share this reward with him. This provides strong motivation for the sole proprietor to work hard.

(c) Quick Decision and Prompt Action:
In a sole proprietorship business the sole proprietor alone is responsible for all decisions. Of course, he can consult others. But he is free to take any decision on his own. Since no one else is involved in decision-making it becomes quick and prompt action can be taken on the basis of this decision.

(d) Better Control:
In sole proprietorship business the proprietor has lull control over each and every activity of the business. He is the planner as well as the organiser, who co-ordinates every activity in an efficient manner. Since the proprietor has all authority with him, it is possible to exercise better control over business.

(e) Maintenance of Business Secrets:
Business secrecy is an important factor for every business. It refers to keeping the future plans, technical competencies, business strategies, etc,, secret from outsiders or competitors. In the case of sole proprietorship business, the proprietor is in a very good position to keep his plans to himself since management and control are in his hands. There is no need to disclose any information to others.

(f) Close Personal Relation:
The sole proprietor is always in a position to maintain good personal contact with the customers and employees. Direct contact enables the sole proprietor to know the individual likes, dislikes and tastes of the customers. Also, it helps in maintaining close and friendly relations with the employees and thus, business runs smoothly.

g) Flexibility in Operation:
The sole proprietor is free to change the nature and scope of business operations as and when required as per his decision. A sole proprietor can expand or curtail his business according to the requirement. Suppose, as the owner of a bookshop, you have been selling books for school students.

If you want to expand your business you can decide to sell stationery items like pens, pencils, registers, etc. If you are running an STD booth, you can expand your business by installing a fax machine in your booth.

(h) Encourages Self-employment:
Sole proprietorship form of business organisation leads to the creation of employment opportunities for people. Not only is the owner self-employed, but sometimes he also creates job opportunities for others. You must have observed in different shops that there are a number of employees assisting the owner in selling goods to the customers. Thus, it helps in reducing poverty and unemployment in the country.

Disadvantages of Sole Trading Concern:
(A) Limited Capital:
In sole proprietorship business, it is the owner who arranges the required capital of the business. It is often difficult for a single individual to raise a huge amount of capital. The owner’s own funds, as well as borrowed funds, sometimes become insufficient to meet the requirement of the business for its growth and expansion.

(B) Unlimited Liability:
In case the sole proprietor fails to pay the business obligations and debts arising out of business activities, his personal properties may have to be used to meet those liabilities. This restricts the sole proprietor from taking risks and he thinks cautiously while deciding to start or expand the business activities.

(C) Lack of Continuity:
The existence of sole proprietorship business is linked to the life of the proprietor. Illness, death or insolvency of the owner brings an end to the business. The continuity of business operation is therefore uncertain.

(D) Limited Size:
Insole proprietorship form of business organisation there is a limit beyond which it becomes difficult to expand its activities. It is not always possible for a single person to supervise and manage the affairs of the business if it grows beyond a certain limit.

(E) Lack of Managerial Expertise:
A sole proprietor may not be an expert in every aspect of management. He/she may be an expert in administration, planning, etc., but maybe poor in marketing. Again, because of limited financial resources, it is also not possible to employ a professional manager. Thus, the business lacks the benefits of professional management.

Question 4.
Briefly explain the Advantages and Disadvantages of Cooperative Societies.
Answer:
Advantages of Cooperative Societies: A Co-operative form of business organisation has the following advantages:
(A) Easy Formation:
The formation of a co-operative society is very easy compared to a joint-stock company. Any ten adults can voluntarily form an association and get it registered with the Registrar of Co-operative Societies.

(B) Open Membership:
Persons having common interests can form a co-operative society. Any competent person can become a member at any time he/she likes and can leave the society at will.

(C) Democratic Control:
A co-operative society is controlled in a democratic manner. The members cast their vote to elect their representatives to form a committee that looks after the day-to-day administration. This committee is accountable to all the members of the society.

(D) Limited Liability:
The liability of members of a co-operative society is limited to the extent of capital contributed by them. Unlike sole proprietors and partners, the personal properties of members of the co-operative societies are free from any kind of risk because of business liabilities.

(E) Elimination of Middlemen’s Profit:
Through co-operatives, the members or consumers control their own supplies, and thus, middlemen’s profit is eliminated.

Disadvantages of Cooperative Societies:
(a) Limited Capital:
The amount of capital that a cooperative society can raise from its member is very limited because the membership is generally confined to a particular section of the society. Again due to the low rate of return the members do not invest more capital. Government assistance is often inadequate for most co-operative societies.

(b) Problems in Management:
Generally, it is seen that co-operative society do not function efficiently due to a lack of managerial talent. The members or their elected representatives are not experienced enough to manage the society. Again, because of limited capital, they are not able to get the benefits of professional management.

(c) Lack of Motivation:
Every co-operative society is formed to render service to its members rather than to earn a profit. This does not provide enough motivation to the members to put in their best effort and manage the society efficiently.

(d) Lack of Co-operation:
Co-operative societies are formed with the idea of mutual cooperation. But it is often seen that there is a lot of friction between the members because of personality differences, ego clashes, etc. The selfish attitude of members may sometimes bring an end to society.

(e) Dependence on Government:
The inadequacy of capital and various other limitations make cooperative societies dependent on the government for support and patronage in terms of grants, loan subsidies, etc. Due to this, the government sometimes directly interferes in the management of the society and also audits their annual accounts.