NCERT Solutions Class 11 Business Studies Forms of Business Organisation

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NCERT Solutions Class 11 Business Studies Chapter2 Forms of Business Organisation

Exercises

Multiple choice Questions

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

  • Sole proprietorship
  •  Partnership
  •  Company
  •  All business organizations

Answer: c) Company - In a company, ownership and management are two different aspects of business. In a company, management and ownership lie in the hands of different individuals. A company is owned by shareholders but its management is handled by a group of elected persons known as the Board of Directors.

  1. The karta in Joint Hindu family business has
  1. Limited liability
  2. Unlimited liability
  3. No liability for debts
  1. Joint liability

Answer: b) unlimited liability -  All the members in the family have limited liability to the extent of their property but karta has unlimited liability.

  1. In a cooperative society the principle followed is
  1. One share one vote
  2. One man one vote
  3. No vote
  4. Multiple vote

Answer: b) one man one vote - To choose the secretary, only one vote from one member is allowed.

 

  1. The board of directors of a joint stock company is elected by
  1. General public
  2. Government bodies
  3. Shareholders
  4. Employees

Answer: c) Shareholders - A company is an association of persons formed for caring out business activities and has legal entity of its own. The shareholders are the owners of the company who appoint the Board of Directors.

 

  1. The maximum number of partners allowed in the banking business are
  1. Twenty
  2. Ten
  3. No limit
  4. Two

 

Answer: b) ten - The maximum number of partners allowed in a banking business is ten. In other business, the maximum number of partners allowed is twenty

 

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

  • Partnership
  • Joint Hindu family business
  • Sole proprietorship
  • Company

Answer: c) sole proprietorship - A sole proprietorship is only one person's business, so he does not have to share any profits.

 

  1. - The capital of the company is divided into number of parts each one of which are called 
  1. Dividend
  2. Profit
  3. Interest
  4. Share

Answer: d) share -

A share is a part of capital in a company which is divided into number of units.

 Q8. The Head of the Joint Hindu Family business is called

  1. Proprietor
  2. Director
  3. Karta
  4. Manager

 Answer: c) Karta - The business is controlled by head of the family who is the eldest member and is called karta.

 

  1. Provision of residential accommodation to the members at reasonable rates are the objective of 
  1. Producer’s cooperative
  2. Consumer’s cooperative
  3. Housing cooperative
  4. Credit cooperative

 

Answer: c) Housing cooperative - Co-operatives are a means to provide products to  members at reasonable rates. Housing cooperative aims at providing accommodation to its members by

 constructing houses and giving them the option of paying the cost in installments.

 

  1. A partner whose association with the firm is unknown to the general public is called 
  1. Active partner
  2. Sleeping partner
  3. Nominal partner
  4. Secret partner

 

Answer: d) Secret partner - Partner whose association with the firm is unknown to the general public is called secret partner. However, in all other aspects he is like the rest of the partners. He contributes to the capital of the firm, takes part in the management, share its profits and losses, and has unlimited liablity towards creditors.

 Short Answer Questions

 For which of the following types of business do you think a sole proprietorship form of business organizations would be more suitable, and why? 

  1. Grocery store 
  2. Medical store 
  3. Legal consultancy 
  4. Craft centre 
  5. Internet café 
  6. Chartered accountancy firm

 

Answer: a) grocery store, b) medical store, d) craft centre, e) internet café

 Sole proprietorship form of business organizations are suitable for grocery store, medical store, craft centre and internet café. This is because these businesses require limited capital and limited managerial skill to carry out the day to day operations. One single person can make decisions .

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

 Grocery store

 Medical clinic

 Legal consultancy

 Craft centre

 Internet café

 Chartered accountancy firm

 Answer: c) legal consultancy f) chartered accountancy firm

A partnership firm is a form of business organisation between two or more persons who have agreed to share the profits of the business, carried on by all or by one acting for all. Legal consultancy and chartered accountancy firm required high managerial ability to handle the diverse activities and wide range of operations. These require joint decision making and risk taking in order to earn maximum profit.

 

  1. Explain the following terms in brief. 
  1. Perpetual succession
  2. Common seal
  3. Karta
  4. Artificial person

 

  1. Perpetual succession: This means that the existence of a company is not affected by the death, retirement, resignation, insolvency or insanity of its members. The company will continue to exist even if all the members die.

 

  1. Common Seal: A common seal is the official signature of a company that is used by its board of directors in all the official documents. Any agreement which does not have a company common seal put on , it is not legally binding on the company.
  2. Karta: In a Joint Hindu family business , the business is controlled by head of the family who is the eldest member and is called karta. All the members in the family have limited liability to the

 

extent of their property but karta has unlimited liability.

  1. Artificial person: A company is a creation of law and exists independent of its members. Like natural persons, a company can own property, incur debts, borrow money, enter into contracts, sue and be sued but unlike them it cannot breathe, eat, run, walk , talk and so on. 
  1. Compare the status of a minor in a Joint Hindu Family Business with that in a partnership firm. 

Answer -- In a Joint Hindu family business, membership in the family business is by birth. This means that as soon as a child is born in the family, he is automatically entitled to share in his family business. Hence a minor enjoys the equal ownership right over the inherited property. As per Partnership Act, 1923, no minor can be a partner in a partnership firm. But partnership firm with the consent of the partners can admit a minor to share the profits of the firm but he cannot be asked to either contribute capital or bear the losses incurred by the business. A minor is not legally bound to enter into any legal contract. He can therefore not be considered to be a partner. 

 

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

 

Answer - Registration in case of a partnership firm is optional yet many firms voluntary opt for it as there are various disadvantages for not registering. Some of the advantages of registration are as follows –

 

  1. A suit can be filed by the partners in the court of law against third party

 

  1. A suit can be filed by the partners against other partners firm for the recovery of loans
  • A suit can be filed by the partners against an unregistered firm for the recovery of loans
  1. A suit can be filed by the partners against the firm or other partners for the dissolution of the firm
  2. A suit can be filed by the partners against the firm or other partners for the settlement of accounts.

 

  1. State the important privileges available to a private company.

 

Answer - Privileges of a private limited company as against a public limited company: 

  • A private company can be formed only by two members, whereas seven persons are needed to form a public company. 
  • There is no need to issue a prospectus as public is not invited to subscribe to the shares of a private company.
  • Allotment of shares can be done without receiving the minimum subscription. 
  • A private company can start business as soon as it obtains the certificate of incorporation, whereas a public company can start its business only after receiving the certificate of commencement of the business.
  • A private company needs to have only two directors as against the minimum of three directors in case of a public company. 
  • A private company is not required to keep an index of members, while it is necessary in case of a public company.

 

  1. How does a cooperative society exemplify democracy and secularism? Explain. 

Answer - In a cooperative society, the power to take a decision lies in the hands of an elected managing committee. The right to vote gives the members the chance to choose the members who will constitute the managing committee and this lends the cooperative society a democratic character. Moreover there is no discrimination among the members on the basis of their religion, caste or sex. The members are free to elect the members of the managing committee of their choice. Hence a cooperative society exemplifies a secularist system.

 

  1. - What is meant by ‘partner by estoppel’? Explain. 

Answer - A person is considered to be a partner by estoppel if, through his/her own initiative, conduct or behaviour , he /she gives an impression to others that he/she is a partner of the firm. Such partners are held liable for the debts of the firm because in the eyes of the third party they are considered partners, even though they do not contribute capital or take part in its management.

 

Long Answer Questions. 

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

Answer  - Sole proprietorship firm is run by a single person. He is the owner and the manager. He solely invests in business ,enjoys profits and fully responsible for losses. Merits proprietorship firm- 

A sole proprietorship firm has the following merits-

  • Formation and closure: It is very easy and simple to form a sole proprietorship form of business organisation. No legal formalities are required to be observed. Similarly, the business can be wound up any time if a proprietor so decides.
  • Direct incentives: In sole proprietorship form of business organisation, the entire profit of the business goes to the owner. This motivates the proprietor to work hard and run the business efficiently. 
  • Prompt decision making: As the sole trader takes all the decisions himself, the decision making becomes quick, which enables the owner to take care of the available opportunities immediately and provide immediate solutions to the problems.
  • Confidentiality of information: The business secrets are known only to a proprietor. He/she is not required to disclose any information to others unless and until he/she himself so decides. He/she is also not bound to publish his/her business accounts.
  • Better control: An owner has full control over his/her business. He/she plans, organises and co-ordinates the various activities. Since he/she has all the authority, there is always effective control. 

Limitations of a sole proprietorship firm- 

  1. Limited Capital Resources – Limited financial resources and borrowing capacity of a sole trader which leads to limited scope for expanding its operations.
  2. Limited Managerial Ability - Limited organising ability and managerial skills of the proprietor may lead to errors of judgement and unbalanced decisions.
  • Unlimited Liability - The sole trader is held personally liable for the losses incurred in the business which means personal property of the owner may be taken for paying debts in case business assets are insufficient.
  1. Limited Scope for Expansion - Limited financial and managerial resources give a little scope for expansion and growth of business and benefits of economies of scale can’t be taken due to its small scale operations. 

 

Q2. - Why is partnership considered by some to be a relatively unpopular form of business ownership? Explain the merits and limitations of partnership. 

Answer - Partnership is considered to be a relatively unpopular form of business ownership because of the various limitations associated with it . These limitations are unlimited liability, limited resources, possibility of conflicts and lack of continuity. The merits of partnership are: 

  1. Ease of formation and closure: The partnership business can be formed easily without any legal formalities. It is not necessary to get the firm registered. A simple agreement, either oral or in writing, is sufficient to create a partnership firm.
  2. More funds: Two or more partners join hand to start partnership business, pooling more resources compared to sole proprietorship. The partners can contribute more capital, more efforts and also more time for the business. 
  • Sharing of risks: In a partnership firm all the partners share the business risks. This reduces the anxiety, burden and stress on individual partners.

 

The limitations of partnership are: 

  1. Unlimited liability – In partnership, if the business assets prove to be insufficient, then the partners are liable to repay the debts even from their personal resources. 
  1. Limited resources – The capital invested is usually not sufficient to support large scale business as there is restriction on the number of partners, thus, resulting in less contribution in terms of capital investment. 
  • Lack of continuity – Partnership lacks stability as with death, lunacy, or insolvency of any partner. Therefore, the partnership comes to an end, resulting in lack of continuity.
  1. Lack of public confidence – There is no legal requirement to publish a firm’s financial reports or other related documents. This results in low confidence among the public for partnership firms. 
  1. Possibility of conflicts – In a partnership firm, every partner has an equal right to participate in the management. Every partner can place his or her opinion before the management regarding any matter at any time. Difference of opinion may give rise to quarrels and lead to dissolution of the firm. 
  1. Why is it important to choose an appropriate form of organisation? Discuss the factors that determine the choice of form of organisation. 

Answer - It is important to choose an appropriate form of business organisation because there exist numerous forms of business organisations like sole proprietorship, partnership, joint stock company, cooperative society etc, the choice of an appropriate business organisation is very important as each business has its merits and demerits. Selection of an appropriate form of business organisation can be made after taking various factors into consideration like initial costs, liability, continuity etc. The growth prospects of different forms of business organizations are different. If a business opts for a particular type of business organization without evaluating its merits and demerits, the business might not survive. Hence it is very important to choose an appropriate form of business organisation. 

The factors affecting choice of the form of Business Organisation are:

  1. Nature of Business: Businesses providing direct services as small retailers, tailors, and professional services as doctors, lawyers, etc. depend for their success upon personal attention to customers and their skills. Business activities requiring pooling of skills and funds as in wholesale trade, stock brokers, etc., are better organised as partnerships.
  2. Degree of control desired: A person who desires direct control of business prefers proprietorship rather than a company that has separate ownership and management. However, in large scale operations, it is desirable to adopt the company form of ownership. 
  • 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 unlimited personal liability and desires maximum share of profits then proprietorship or partnership is preferable.
  1. Flexibility of operations: Businesses which require a high degree of administrative flexibility should be better organised as proprietorship or partnership. Flexibility of operations is linked with internal organisation of business. The internal organisation of proprietorship or partnership is simple. 
  • Duration of business: Temporary and ad-hoc ventures can be organised as proprietorship or partnership as they are easy to form and dissolve. Long term form of businesses should adopt company form of organisation. 
  1. - Discuss the characteristics, merits and limitations of cooperative form of organisation. Also describe briefly different types of cooperative societies. 

Answer -  Following points state the characteristics of cooperative organisation: 

  • Voluntary Association – It is a voluntary association of individuals. It involves people desirous of improving their economic status through joint action. People having common interest are free to join. 
  • One man one vote – It is a democratic organisation. Irrespective of the shares held by members, every member has one vote. There is equal voice of all members in its management. 
  • Service Motive – It mainly aims at providing services to its members. The profit is earned for the benefit of its members. It stands by the motto – each for all & all for each. 
  • Limited liability – The liability of the members of a cooperative society is limited to the extent of the amount contributed by them as capital. 
  • Legal status – Registration of a cooperative society is compulsory. A registered cooperative society can enter into contracts and hold property in its name, can sue and be sued by others.
  • Control- In a cooperative society, the power to take decisions lies in the hands of an elected managing committee. 

Following are the merits of Cooperative organisation: 

  1. Ease of Formation – It requires only ten adult individuals. Less money & time are needed for its registration. Few simple legal formalities are to be followed. 
  • State Patronage – Several concessions in taxes, finance, etc. is provided by the government. It enjoys special privileges & exemptions. 
  • Limited liability – There is limited liability to the extent of the share of the member in society’s capital. Risk faced by every member is limited and known. 
  1. . Democratic Management – Every member has an equal vote or voice. There is no discrimination on the basis of member’s capital contribution. It follows the principle of one man one vote. No small group of members can dominate the control of the society. v. Internal Financing – Every year, a large part of the profit is transferred to general reserve. Not more than 10% is paid as dividend. It facilitates expansion & growth of the society due to the profits that are ploughed back in. 

Following are the limitations of cooperative organisation:

  1. Limited Capital – It is formed by people with limited means. They are not able to mobilise adequate capital for large scale operations. 
  1. Inefficient Management – Often, the office bearers elected are not competent & are do not have adequate experience. It cannot afford to employ expert professionals at high salaries. 
  • Excessive Government Control – It is bounded by legal rules & regulations. There is less flexibility & initiative due to time consuming formalities. 
  1. . Rift Among Members – Often, disputes arise between the managing committee & the members. As members are from different sections of the society, often, there is lack of harmony & amity between them. 
  1. Lack of Secrecy – Open discussions of the affairs of the society is discussed in their meetings. Inspection of books and records can be done by every member. 

Different types of cooperative organizations are-

 

Following are the three types of Cooperative Societies: 

  1. Consumer Cooperative Societies – These are established for protecting the interest of consumers. The members comprise of the consumers who desire to obtain good quality goods at reasonable prices. It aims at eliminating middlemen for achieving economy in operations.
  2. Marketing Cooperative Societies – These are formed to help small producers in selling their products who find it difficult to operate the marketing functions individually.  The members comprise of independent producers wishing to obtain reasonable prices for their output. It aims at  eliminating middlemen by selling the output of different members through a centralised agency. 
  1. Housing Cooperative Societies – These are formed to help people with limited income to construct houses at reasonable costs. The members comprise of people who desire to procure residential accommodation at lower costs.
  2. Producer’s cooperative societies - Producer’s cooperative societies are voluntary association of small producers & artisans. It supplies raw materials, equipment’s & other inputs to the members and purchases their output for sale. It aims at fighting against the big capitalists and enhancing the bargaining power of the small manufacturers. The profits are distributed on the basis of their contribution to the total goods produced or sold. Manufacturing cooperatives are a type of Producer’s Cooperative Societies. In this, the producers are treated as employees of the society. They are paid wages for their work. Raw material & equipment is provided to every member. Production of goods is at a common place or in member’s houses. The output is sold in the market by the society. The profits are distributed among the members.
  3. Credit cooperative societies- A Credit Cooperative Society provides financial aid in the form of loans to its members. It is formed to provide easy credit on reasonable terms to the members and to inculcate the habit of savings among members. It provides loans to members mainly for agricultural activities in rural areas & for household needs in urban areas. It aims at protecting the members from the exploitation of lenders who charge high rates of interests on loans. The society provides loans at low interest to members. The loans are provided out of the total capital contributed and deposits received from other members. 

Farmers cooperative societies- These societies are established to protect the interests of farmers by providing better inputs at a reasonable cost. The aim is to gain the benefits of large scale farming and increase productivity. Such societies provide better quality seeds, fertilizers, machinery and other modern techniques for use in the cultivation of crops. 

 

  1. Distinguish between Joint Hindu family business and Partnership.

 

Basis of

Partnership

Joint Hindu family

Difference

 

Business

 

 

 

Governed by

Is governed by

Is governed by

 

Partnership Act

Hindu Succession

 

1932

Act

 

 

 

Management

All the partners

Only Karta

 

manage and

manages and

 

control the

controls the

 

business of the

family business

 

firm

 

 

 

 

 

Liability

Of all the partners

Of only karta is

 

is unlimited

unlimited. All

 

 

other members

 

 

have limited

 

 

liability

 

 

 

Minor

Cannot be a

Can be a member

 

partner of a firm

of the business.

 

 

 

 

 

 

 

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

Answer -  Despite limitations of size and resources, many people continue to prefer sole proprietorship over other forms of organizations due to the following reasons:

  1. Formation and closure: It is very easy and simple to form a sole proprietorship form of business organisation. No legal formalities are required to be observed. Similarly, the business can be wound up any time if a proprietor so decides. 
  1. Direct incentives: In sole proprietorship form of business organisation, the entire profit of the business goes to the owner. This motivates the proprietor to work hard and run the business efficiently. 
  • Prompt decision making: As the sole trader takes all the decisions himself, the decision making becomes quick, which enables the owner to take care of the available opportunities immediately and provide immediate solutions to the problems. 
  1. Confidentiality of information: The business secrets are known only to a proprietor. He/she is not required to disclose any information to others unless and until he/she himself so decides. He/she is also not bound to publish his/her business accounts.
  2. Better control: An owner has full control over his/her business. He/she plans, organises and co-ordinates the various activities. Since he/she has all the authority, there is always effective control.

 

Application Questions: 

In which form of organization is a trade agreement made by one owner binding on the others? Give reasons to support your Answer? 

Answer: - It is under partnership that the trade agreement made by one owner becomes binding for others. This is because every partner acts for each other. In other words, every partner is both a principle as well as an agent. As an agent he binds others through his actions and as a principle he is bind by the action of others. 

  1. the business assets of an organisation amount to Rs 50000 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 
  1. The organisation is a partnership firm with Anthony and Akbar as partners. Which of the two partners can the creditors approach for repayment of debt? Explain giving reasons. 

Answer:

  1. In case of a sole proprietorship the creditors can claim the personal property of the property. This is because the proprietor has unlimited liability. 
  1. The creditors can approach any of the two partners for repayment as both the partners have the liability to pay according to their profit sharing ratio. The creditors can approach one of them in case the other is insolvent. 
  1. - 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? 
  1. What legal formalities will she have to undergo to operate business as a company?

 Answer:

  1. The benefit of remaining a sole proprietor is that
  2. A sole proprietor will benefit from all the profits as she will not be required to share profits with anybody
  3. A sole proprietor can take quick decisions and enjoy complete control over the business.
  4. The benefits of converting to a joint stock company are
  5. Availability of large resource – Company form of ownership enables the collection of huge financial resource
  6. Limited liability - In case of joint stock company the liability of the members is limited to the extent of value of shares held by them
  7. If she plans to go nation wide then converting to a Joint Stock Company would be more appropriate as it will lead to large scale production and this in turn will increase profit. 
  1. Some of the legal formalities to be completed for operating a joint stock company are as follows –
  2. Promotion of a company
  3. Submitting documents such as Memorandum of association, Articles of Association, statutory declaration and agreement  Getting the certification of incorporation

 

  1. iv) Getting the certificate of commencement of business

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