NCERT Class 11 Business Studies PDF

CHAPTER 2 FORMS OF BUSINESS O RGANISATION LEARNING OBJECTIVES After studying this chapter, you should be able to: identify different forms of business organisation; explain features, merits and limitations of different forms of...

CHAPTER 2 FORMS OF BUSINESS O RGANISATION LEARNING OBJECTIVES After studying this chapter, you should be able to: identify different forms of business organisation; explain features, merits and limitations of different forms of business organisations; distinguish between various forms of organisations; and discuss the factors determining choice of an appropriate form of business organisation. 2019-20 28 BUSINESS STUDIES Neha, a bright final year student was waiting for her results to be declared. While at home she decided to put her free time to use. Having an aptitude for painting, she tried her hand at decorating clay pots and bowls with designs. She was excited at the praise showered on her by her friends and acquaintances on her work. She even managed to sell a few pieces of unique hand pottery from her home to people living in and around her colony. Operating from home, she was able to save on rental payments. She gained a lot of popularity by word of mouth publicity as a sole proprietor. She further perfected her skills of painting pottery and created new motifs and designs. All this generated great interest among her customers and provided a boost to the demand for her products. By the end of summer, she found that she had been able to make a profit of Rs. 2500 from her paltry investment in colours, pottery and drawing sheets. She felt motivated to take up this work as a career. She has, therefore, decided to set up her own artwork business. She can continue running the business on her own as a sole proprietor, but she needs more money for doing business on a larger scale. Her father has suggested that she should form a partnership with her cousin to meet the need for additional funds and for sharing the responsibilities and risks. Side by side, he is of the opinion that it is possible that the business might grow further and may require the formation of a company. She is in a fix as to what form of business organisation she should go in for? 2.1 INTRODUCTION (d) Cooperative societies, and If one is planning to start a business or (e) Joint stock company. is interested in expanding an existing Let us start our discussion with one, an important decision relates to sole proprietorship — the simplest form the choice of the form of organisation. of business organisation, and then The most appropriate form is move on to analysing more complex determined by weighing the forms of organisations. advantages and disadvantages of each type of organisation against one’s own 2.2 SOLE PROPRIETORSHIP requirements. Do you often go in the evenings to buy Various for ms of business registers, pens, chart papers, etc., from organisations from which one can a small neighbourhood stationery choose the right one include: store? Well, in all probability in the (a) Sole proprietorship, course of your transactions, you have (b) Joint Hindu family business, interacted with a sole proprietor. Sole proprietorship is a popular (c) Partnership, form of business organisation and is 2019-20 FORMS OF BUSINESS ORGANISATION 29 the most suitable form for small formation as well as closure of businesses, especially in their initial business. years of operation. Sole proprietorship (ii) Liability: Sole proprietors have refers to a form of business unlimited liability. This implies that the organisation which is owned, managed owner is personally responsible for and controlled by an individual who payment of debts in case the assets of is the recipient of all profits and bearer the business are not sufficient to meet of all risks. This is evident from the all the debts. As such the owner’s term itself. The word “sole” implies personal possessions such as his/her “only”, and “proprietor” refers to personal car and other assets could be “owner”. Hence, a sole proprietor is the sold for repaying the debt. Suppose the one who is the only owner of a total outside liabilities of XYZ dry business. cleaner, a sole proprietorship firm, are This form of business is particularly Rs. 80,000 at the time of dissolution, common in areas of personalised but its assets are Rs. 60,000 only. In services such as beauty parlours, hair such a situation the proprietor will have saloons and small scale activities like to bring in Rs. 20,000 from her running a retail shop in a locality. personal sources even if she has to sell Sole trader is a type of business unit where a person is solely responsible for providing the capital, for bearing the risk of the enterprise and for the management of business. J.L. Hansen The individual 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 Features her personal property to repay the firm’s debts. Salient characteristics of the sole proprietorship form of organisation are (iii) Sole risk bearer and profit as follows: recipient: The risk of failure of business is borne all alone by the sole (i) Formation and closure: There is proprietor. However, if the business is no separate law that governs sole successful, the proprietor enjoys all the proprietorship. Hardly any legal benefits. He receives all the business formalities are required to start a sole profits which become a direct reward proprietary business, though in some for his risk bearing. cases one may require a license. Closure of the business can also be (iv) Control: The right to run the done easily. Thus, there is ease in business and make all decisions lies 2019-20 30 BUSINESS STUDIES absolutely with the sole proprietor. He Merits can carry out his plans without any Sole proprietorship offers many interference from others. advantages. Some of the important ones (v) No separate entity: In the eyes of are as follows: the law, no distinction is made between the sole trader and his business, as (i) Quick decision making: A sole business does not have an identity proprietor enjoys considerable degree separate from the owner. The owner is, of freedom in making business therefore, held responsible for all the decisions. Further the decision making activities of the business. is prompt because there is no need to consult others. This may lead to timely (vi) Lack of business continuity: The capitalisation of market opportunities sale proprietorship business is owned as and when they arise. and controlled by one person, therefore death, insanity, imprisonment, (ii) Confidentiality of information: physical ailment or bankruptcy of the Sole decision making authority enables sole proprietor will have a direct and the proprietor to keep all the detrimental effect on the business and information related to business may even cause closure of the business. operations confidential and maintain A Refreshing Start: Coca Cola Owes its Origin to a Sole Proprietor! The product that has given the world its best-known taste was born in Atlanta, Georgia, on May 8, 1886. Dr. John Stith Pemberton, a local pharmacist, produced the syrup for Coca-Cola®, and carried a jug of the new product down the street to Jacobs’ Pharmacy, where it was sampled, pronounced “excellent” and placed on sale for five cents a glass as a soda fountain drink. Dr. Pemberton never realised the potential of the beverage he created. He gradually sold portions of his business to various partners and, just prior to his death in 1888, sold his remaining interest in Coca-Cola to Asa G. Candler. An Atlantan with great business acumen, Mr. Candler proceeded to buy additional business rights and acquire complete control. On May 1, 1889, Asa Candler published a full-page advertisement in The Atlanta Journal, proclaiming his wholesale and retail drug business as “sole proprietors of Coca-Cola... Delicious. Refreshing. Exhilarating. Invigorating.” Sole ownership, which Mr. Candler did not actually achieve until 1891, needed an investment of $ 2,300. It was only in 1892 that Mr. Candler formed a company called The Coca-Cola Corporation. Source: Website of Coca Cola company. 2019-20 FORMS OF BUSINESS ORGANISATION 31 secrecy. A sole trader is also not bound others. Banks and other lending by law to publish firm’s accounts. institutions may hesitate to extend a (iii) Direct incentive: A sole long term loan to a sole proprietor. proprietor directly reaps the benefits of Lack of resources is one of the major his/her efforts as he/she is the sole reasons why the size of the business recipient of all the profit. The need to rarely grows much and generally share profits does not arise as he/she remains small. is the single owner. This provides (ii) Limited life of a business maximum incentive to the sole trader concern: The sole proprietorship to work hard. business is owned and controlled by (iv) Sense of accomplishment: There one person, so death, insanity, is a personal satisfaction involved in imprisonment, physical ailment or working for oneself. The knowledge bankruptcy of a proprietor affects the that one is responsible for the success business and can lead to its closure. of the business not only contributes to (iii) Unlimited liability: A major self-satisfaction but also instils in the disadvantage of sole proprietorship is individual a sense of accomplishment that the owner has unlimited liability. If and confidence in one’s abilities. the business fails, the creditors can (v) Ease of formation and closure: recover their dues not merely from the An important merit of sole business assets, but also from the proprietorship is the possibility of personal assets of the proprietor. A entering into business with minimal poor decision or an unfavourable circumstance can create serious legal formalities. There is no separate financial burden on the owner. That is law that governs sole proprietorship. As why a sole proprietor is less inclined to sole proprietorship is the least take risks in the form of innovation regulated form of business, it is easy or expansion. to start and close the business as per the wish of the owner. (iv) Limited managerial ability: The owner has to assume the responsibility Limitations of varied managerial tasks such as purchasing, selling, financing, etc. It is Notwithstanding various advantages, rare to find an individual who excels in the sole proprietorship form of all these areas. Thus decision making organisation is not free from may not be balanced in all the cases. limitations. Some of the major Also, due to limited resources, sole limitations of sole proprietorship are proprietor may not be able to employ as follows: and retain talented and ambitious (i) Limited resources: Resources of employees. a sole proprietor are limited to his/her Though sole proprietorship suffers personal savings and borrowings from from various shortcomings, many 2019-20 32 BUSINESS STUDIES entrepreneurs opt for this form of Features organisation because of its inherent The following points highlight the advantages. It requires less amount of essential characteristics of the joint capital. It is best suited for businesses Hindu family business. which are carried out on a small scale and where customers demand (i) Formation: For a joint Hindu family personalised services. business, there should be at least two members in the family and ancestral 2.3 JOINT HINDU FAMILY BUSINESS property to be inherited by them. The business does not require any Joint Hindu family business is a agreement as membership is by birth. specific form of business organisation It is governed by the Hindu Succession found only in India. It is one of the Act, 1956. oldest forms of business organisation in the country. It refers to a form of (ii) Liability: The liability of all organisation wherein the business is members except the karta is limited to owned and carried on by the members their share of co-parcenery property of of the Hindu Undivided Family (HUF). the business. The karta, however, has It is governed by the Hindu Law. The unlimited liability. basis of membership in the business is (iii) Control: The control of the family birth in a particular family and three business lies with the karta. He takes Gender Equality in the Joint Hindu Family a Reality According to the Hindu Succession (Amendment) Act, 2005, the daughter of a coparcener of a Joint Hindu Family shall, by birth, become a coparcener. At the time of partition of such a ‘Joint Hindu Family’ the coparcenary property shall be equally divided to all the coparceners irrespective of their gender (male or female). The eldest member (male or female) of ‘Joint Hindu Family’ shall become Karta. Married daughter has equal rights in property of a Joint Hindu Family. successive generations can be members all the decisions and is authorised to in the business. manage the business. His decisions are The business is controlled by the binding on the other members. head of the family who is the eldest (iv) Continuity: The business member and is called karta. All continues even after the death of the members have equal ownership right karta as the next eldest member takes over the property of an ancestor and up the position of karta, leaving the they are known as co-parceners. business stable. The business can, 2019-20 FORMS OF BUSINESS ORGANISATION 33 however, be terminated with the Limitation mutual consent of the members. The following are some of the (v) Minor Members: The inclusion of limitations of a joint Hindu family an individual into the business occurs business. due to birth in a Hindu Undivided Family. Hence, minors can also be (i) Limited resources: The joint Hindu members of the business. family business faces the problem of limited capital as it depends mainly on Merits ancestral property. This limits the The advantages of the joint Hindu scope for expansion of business. family business are as follows: (ii) Unlimited liability of karta: The (i) Effective control: The karta has karta is burdened not only with the absolute decision making power. This responsibility of decision making and avoids conflicts among members as no management of business, but also one can interfere with his right to suffers from the disadvantage of decide. This also leads to prompt and having unlimited liability. His personal flexible decision making. property can be used to repay business (ii) Continued business existence: debts. The death of the karta will not affect (iii) Dominance of karta: The the business as the next eldest member karta individually manages the will then take up the position. Hence, business which may at times not be operations are not terminated and acceptable to other members. This continuity of business is not may cause conflict amongst them and threatened. may even lead to break down of the (iii) Limited liability of members: family unit. The liability of all the co-parceners (iv) Limited managerial skills: except the karta is limited to their share Since the karta cannot be an expert in the business, and consequently their in all areas of management, the risk is well-defined and precise. business may suffer as a result of his (iv) Increased loyalty and unwise decisions. His inability to cooperation: Since the business is run decide effectively may result into by the members of a family, there is a poor profits or even losses for the greater sense of loyalty towards one organisation. other. Pride in the growth of business The joint Hindu family business is is linked to the achievements of the on the decline because of the family. This helps in securing better diminishing number of joint Hindu cooperation from all the members. families in the country. 2019-20 34 BUSINESS STUDIES 2.4 PARTNERSHIP must be lawful and run with the motive of profit. Thus, two people coming The inherent disadvantage of the sole together for charitable purposes will proprietorship in financing and not constitute a partnership. managing an expanding business paved the way for partnership as a viable option. (ii) Liability: The partners of a firm Partnership serves as an answer to the have unlimited liability. Personal assets needs of greater capital investment, may be used for repaying debts in case varied skills and sharing of risks. the business assets are insufficient. Partnership is the relation between persons competent to make contracts who have agreed to carry on a lawful business in common with a view to private gain. L H Haney Partnership is the relation which subsists between persons who have agreed to combine their property, labour or skill in some business and to share the profits therefrom between them. The Indian Contract Act 1872 The Indian Partnership Act, 1932 Further, the partners are jointly and defines partnership as “the relation individually liable for payment of debts. between persons who have agreed to Jointly, all the partners are responsible share the profit of the business for the debts and they contribute in carried on by all or any one of them proportion to their share in business acting for all.” and as such are liable to that extent. Features Individually too, each partner can be held responsible repaying the debts of Definitions given above point to the the business. However, such a partner following major characteristics of the partnership form of business can later recover from other partners organisation. an amount of money equivalent to the shares in liability defined as per the (i) Formation: The partnership form partnership agreement. of business organisation is governed by the Indian Partnership Act, 1932. It (iii) Risk bearing: The partners bear comes into existence through a legal the risks involved in running a agreement wherein the terms and business as a team. The reward comes conditions governing the relationship in the form of profits which are shared among the partners, sharing of profits by the partners in an agreed ratio. and losses and the manner of However, they also share losses in the conducting the business are specified. same ratio in the event of the firm It may be pointed out that the business incurring losses. 2019-20 FORMS OF BUSINESS ORGANISATION 35 (iv) Decision making and control: Merits The partners share amongst themselves The following points describe the the responsibility of decision making advantages of a partnership firm. and control of day to day activities. Decisions are generally taken with (i) Ease of formation and closure: A partnership firm can be formed easily mutual consent. Thus, the activities of by putting an agreement between the a partnership firm are managed prospective partners into place through the joint efforts of all the whereby they agree to carryout the partners. business of the firm and share risks. (v) Continuity: Partnership is There is no compulsion with respect to characterised by lack of continuity of registration of the firm. Closure of the business since the death, retirement, firm too is an easy task. insolvency or insanity of any partner (ii) Balanced decision making: The can bring an end to the business. partners can oversee different However, the remaining partners may functions according to their areas of if they so desire continue the business expertise. Because an individual is not on the basis of a new agreement. forced to handle different activities, this (vi) Number of Partners: The not only reduces the burden of work minimum number of partners needed but also leads to fewer errors in to start a partnership firm is two. judgements. As a consequence, According to section 464 of the decisions are likely to be more Companies Act 2013, maximum balanced. number of partners in a partnership (iii) More funds: In a partnership, the firm can be 100, subject to the number capital is contributed by a number of prescribed by the government. partners. This makes it possible to As per Rule 10 of The Companies raise larger amount of funds as (miscelleneous) Rules 2014, at present compared to a sole proprietor and the maximum number of members can undertake additional operations when be 50. needed. (vii) Mutual agency: The definition of (iv) Sharing of risks: The risks partnership highlights the fact that it involved in running a partnership firm is a business carried on by all or any are shared by all the partners. This one of the partners acting for all. In reduces the anxiety, burden and stress other words, every partner is both an on individual partners. agent and a principal. He is an agent of (v) Secrecy: A partnership firm is not other partners as he represents them legally required to publish its accounts and thereby binds them through his and submit its reports. Hence it is able acts. He is a principal as he too can be to maintain confidentiality of information bound by the acts of other partners. relating to its operations. 2019-20 36 BUSINESS STUDIES Limitations retirement, insolvency or lunacy of any partner. It may result in lack of A partnership firm of business continuity. However, the remaining organisation suffers from the following partners can enter into a fresh limitations: agreement and continue to run the (i) Unlimited liability: Partners are business. liable to repay debts even from their (v) Lack of public confidence: A personal resources in case the partnership firm is not legally required business assets are not sufficient to to publish its financial reports or make meet its debts. The liability of partners other related information public. It is, is both joint and several which may therefore, difficult for any member of prove to be a drawback for those the public to ascertain the true financial partners who have greater personal status of a partnership firm. As a result, wealth. They will have to repay the the confidence of the public in entire debt in case the other partners partnership firms is generally low. are unable to do so. (ii) Limited resources: There is a 2.4.1 Types of Partners restriction on the number of partners, A partnership firm can have different and hence contribution in terms of types of partners with different roles capital investment is usually not and liabilities. An understanding of sufficient to support large scale these types is important for a clear business operations. As a result, understanding of their rights and partnership firms face problems in responsibilities. These are described as expansion beyond a certain size. follows: (iii) Possibility of conflicts: (i) Active partner: An active partner Partnership is run by a group of is one who contributes capital, persons wherein decision making participates in the management of the authority is shared. Difference in firm, shares its profits and losses, and opinion on some issues may lead to is liable to an unlimited extent to the disputes between partners. Further, creditors of the firm. These partners decisions of one partner are binding on take actual part in carrying out other partners. Thus an unwise business of the firm on behalf of other decision by some one may result in partners. financial ruin for all others. In case a (ii) Sleeping or dormant partner: partner desires to leave the firm, this Partners who do not take part in the can result in termination of partnership day to day activities of the business are as there is a restriction on transfer of called sleeping partners. A sleeping ownership. partner, however, contributes capital to (iv) Lack of continuity: Partnership the firm, shares its profits and losses, comes to an end with the death, and has unlimited liability. 2019-20 FORMS OF BUSINESS ORGANISATION 37 (iii) Secret partner: A secret partner (v) Partner by estoppel: A person is is one whose association with the firm considered a partner by estoppel if, is unknown to the general public. Other through his/her own initiative, than this distinct feature, in all other conduct or behaviour, he/she gives an aspects he is like the rest of the impression to others that he/she is a partners. He contributes to the capital partner of the firm. Such partners are of the firm, takes part in the held liable for the debts of the firm management, shares its profits and because in the eyes of the third party losses, and has unlimited liability they are considered partners, even towards the creditors. though they do not contribute capital (iv) Nominal partner: A nominal or take part in its management. partner is one who allows the use of Suppose Rani is a friend of Seema who his/her name by a firm, but does not is a partner in a software firm — contribute to its capital. He/she does Simplex Solutions. On Seema’s not take active part in managing the request, Rani accompanies her to a firm, does not share its profit or losses business meeting with Mohan but is liable, like other partners, to the Softwares and actively participates in third parties, for the repayments of the the negotiation process for a business firm’s debts. deal and gives the impression that she Table 2.1 Types of Partners Capital Share in profits/ Type Management Liability contribution losses Contributes Participates in Shares profits/ Unlimited Active partner capital management losses liability Does not Sleeping or Contributes Shares profits/ Unlimited participate in dor mant partner capital losses liability management Participates in Contributes Shares profits/ Unlimited Secret partner management, capital losses liability but secretly Does not Does not Generally does Unlimited Nominal partner contribute participate in not share profits/ liability capital management losses Does not Does not Partner by Does not share Unlimited contribute participate in estoppel profits/ losses liability capital management Does not Does not Partner by Does not share Unlimited contribute participate in holding out profits/ losses liability capital management 2019-20 38 BUSINESS STUDIES Minor as a Partner Partnership is based on legal contract between two persons who agree to share the profits or losses of a business carried on by them. As such a minor is incompetent to enter into a valid contract with others, he cannot become a partner in any firm. However, a minor can be admitted to the benefits of a partnership firm with the mutual consent of all other partners. In such cases, his liability will be limited to the extent of the capital contributed by him and in the firm. He will not be eligible to take an active part in the management of the firm. Thus, a minor can share only the profits and can not be asked to bear the losses. However, he can if he wishes, inspect the accounts of the firm. The status of a minor changes when he attains majority. In fact, on attaining majority, the minor has to decide whether he would like to become a partner in the firm. He has to give a public notice of his decision within six months of attaining majority. If he fails to do so, within the stipulated time, he will be treated as a full-fledged partner and will become liable to the debts of the firm to an unlimited extent, in the same way as other active partners are. is also a partner in Simplex Solutions. 2.4.2 Types of Partnerships If credit is extended to Simplex Partnerships can be classified on the Solutions on the basis of these basis of two factors, viz., duration and negotiations, Rani would also be liable liability. On the basis of duration, there for repayment of such debt, as if she can be two types of partnerships : is a partner of the firm. ‘partnership at will’ and ‘particular (vi) Partner by holding out: A partnership’. On the basis of liability, partner by ‘holding out’ is a person the two types of partnership include: who though is not a partner in a firm one ‘with limited liability’ and the other but knowingly allows himself/herself one ‘with unlimited liability’. These to be represented as a partner in a types are described in the following firm. Such a person becomes liable to sections. outside creditors for repayment of any debts which have been extended to the Classification on the basis of firm on the basis of such duration representation. In case he is not really a partner and wants to save himself (i) Partnership at will: This type of from such a liability, he should partnership exists at the will of the immediately issue a denial, clarifying partners. It can continue as long as his position that he is not a partner in the partners want and is terminated the firm. If he does not do so, he will when any partner gives a notice of be responsible to the third party for withdrawal from partnership to the any such debts. firm. 2019-20 FORMS OF BUSINESS ORGANISATION 39 (ii) Particular partnership: Partner- partnership does not get terminated ship formed for the accomplishment of with the death, lunacy or insolvency of a particular project say construction of the limited partners. The limited a building or an activity to be carried partners do not enjoy the right of on for a specified time period is called management and their acts do not bind particular partnership. It dissolves the firm or the other partners. automatically when the purpose for Registration of such partnership is which it was formed is fulfilled or when compulsory. the time duration expires. This form of partnership was not per mitted in India earlier. The Classification on the basis of permission to form partnership firms liability with limited liability has been granted after introduction of New Small (i) General Partnership: In general Enterprise Policy in 1991. The idea partnership, the liability of partners behind such a move has been to enable is unlimited and joint. The partners the partnership firms to attract equity enjoy the right to participate in the capital from friends and relatives of management of the firm and their small scale entrepreneurs who were acts are binding on each other as earlier reluctant to help, due to the well as on the firm. Registration of existence of unlimited liability clause the firm is optional. The existence in the partnership form of business. of the firm is affected by the death, 2.4.3 Partnership Deed lunacy, insolvency or retirement of the partners. A partnership is a voluntary association of people who come together for (ii) Limited Partnership: In limited achieving common objectives. In order partnership, the liability of at least one to enter into partnership, a clear partner is unlimited whereas the rest agreement with respect to the terms, may have limited liability. Such a conditions and all aspects concerning Price Waterhouse Coopers was a Partnership Firm earlier Price Waterhouse Coopers, one of the world’s top accountancy firms has been created in 1998 by the merger of two companies, Price Waterhouse and Coopers and L ybrand — each with historical roots going back some 150 years to the 19th century Great Britain. In 1850, Samuel Lowell Price set up his accounting business in London. In 1865, he was joined in partnership by William H. Holyland and Edwin Waterhouse. As the firm grew, qualified members of its professional staff were admitted to the partnership. By the late 1800s, Price Waterhouse had gained significant recognition as an accounting firm. Source: Price Waterhouse Coopers archives in Columbia University. 2019-20 40 BUSINESS STUDIES the partners is essential so that there is It is optional for a partnership firm no misunderstanding later among the to get registered. In case a firm does partners. Such an agreement can be not get registered, it is deprived of oral or written. Even though it is not many benefits. The consequences of essential to have a written agreement, it non-registration of a firm are as follows: is advisable to have a written agreement (a) A partner of an unregistered firm as it constitutes an evidence of the cannot file a suit against the firm conditions agreed upon. The written or other partners, agreement which specifies the terms and (b) The firm cannot file a suit against conditions that govern the partnership third parties, and is called the partnership deed. (c) The firm cannot file a case against The partnership deed generally the partners. includes the following aspects: In view of these consequences, it is Name of firm therefore advisable to get the firm Nature of business and location of registered. According to the India business Partnership Act 1932, the partners may Duration of business get the firm registered with the Investment made by each partner Registrar of firms of the state in which Distribution of profits and losses the firm is situated. The registration can Duties and obligations of the be at the time of formation or at any time during its existence. The procedure for partners getting a firm registered is as follows: Salaries and withdrawals of the 1. Submission of application in the partners prescribed form to the Registrar of Terms governing admission, firms. The application should retirement and expulsion of a contain the following particulars: partner Name of the firm Interest on capital and interest on Location of the firm drawings Names of other places where the Procedure for dissolution of the firm carries on business firm The date when each partner joined Preparation of accounts and their the firm auditing Names and addresses of the Method of solving disputes partners Duration of partnership 2.4.4 Registration This application should be signed by Registration of a partnership firm all the partners. means the entering of the firm’s name, 2. Deposit of required fees with the along with the relevant prescribed par- Registrar of Firms. ticulars, in the Register of firms kept 3. The Registrar after approval will with the Registrar of Firms. It provides make an entry in the register of conclusive proof of the existence of a firms and will subsequently issue partnership firm. a certificate of registration. 2019-20 FORMS OF BUSINESS ORGANISATION 41 Cooperative is a form of organisation wherein persons voluntarily associate together as human beings on the basis of equality for the promotion of an economic interest for themselves. E. H. Calvert Cooperative organisation is “a society which has its objectives for the promotion of economic interests of its members in accordance with cooperative principles. The Indian Cooperative Societies Act 1912 2.5 COOPERATIVE SOCIETY anytime as per his desire. There The word cooperative means working cannot be any compulsion for him to together and with others for a common join or quit a society. Although purpose. procedurally a member is required to The cooperative society is a serve a notice before leaving the voluntary association of persons, who society, there is no compulsion to join together with the motive of welfare remain a member. Membership is open of the members. They are driven by the to all, irrespective of their religion, need to protect their economic interests caste, and gender. in the face of possible exploitation at (ii) Legal status: Registration of a the hands of middlemen obsessed with cooperative society is compulsory. This the desire to earn greater profits. accords a separate identity to the society The cooperative society is which is distinct from its members. The compulsorily required to be registered society can enter into contracts and under the Cooperative Societies Act hold property in its name, sue and be 1912. The process of setting up a sued by others. As a result of being a cooperative society is simple enough separate legal entity, it is not affected and at the most what is required is the by the entry or exit of its members. consent of at least ten adult persons (iii) Limited liability: The liability of to form a society. The capital of a the members of a cooperative society is society is raised from its members limited to the extent of the amount through issue of shares. The society contributed by them as capital. This acquires a distinct legal identity after defines the maximum risk that a its registration. member can be asked to bear. Features (iv) Control: In a cooperative society, the power to take decisions lies in the The characteristics of a cooperative hands of an elected managing committee. society are listed below. The right to vote gives the members a (i) Voluntary membership: The chance to choose the members who will membership of a cooperative society constitute the managing committee and is voluntary. A person is free to join a this lends the cooperative society a cooperative society, and can also leave democratic character. 2019-20 42 BUSINESS STUDIES (v) Service motive: The cooperative the society, and hence the risk of bad society through its purpose lays debts is lower. emphasis on the values of mutual help (v) Support from government: The and welfare. Hence, the motive of service cooperative society exemplifies the idea dominates its working. If any surplus of democracy and hence finds support is generated as a result of its operations, from the Government in the form of low it is distributed amongst the members taxes, subsidies, and low interest rates as dividend in conformity with the bye- on loans. laws of the society. (vi) Ease of formation: The cooperative Merits society can be started with a minimum of ten members. The registration The cooperative society offers many procedure is simple involving a few legal benefits to its members. Some of the formalities. Its formation is governed by advantages of the cooperative form of the provisions of Cooperative Societies organisation are as follows. Act 1912. (i) Equality in voting status: The principle of ‘one man one vote’ governs Limitations the cooperative society. Irrespective of The cooperative form of organisation the amount of capital contribution by suffers from the following limitations: a member, each member is entitled to (i) Limited resources: Resources of a equal voting rights. cooperative society consists of capital (ii) Limited liability: The liability of contributions of the members with members of a cooperative society is limited means. The low rate of dividend limited to the extent of their capital offered on investment also acts as a contribution. The personal assets of the deterrent in attracting membership or members are, therefore, safe from being more capital from the members. used to repay business debts. (ii) Inefficiency in management: (iii) Stable existence: Death, Cooperative societies are unable to bankruptcy or insanity of the members attract and employ expert managers do not affect continuity of a cooperative because of their inability to pay them society. A society, therefore, operates high salaries. The members who offer unaffected by any change in the honorary services on a voluntary basis membership. are generally not professionally (iv) Economy in operations: The equipped to handle the management members generally offer honorary functions effectively. services to the society. As the focus is (iii) Lack of secrecy: As a result of on elimination of middlemen, this helps open discussions in the meetings of in reducing costs. The customers or members as well as disclosure producers themselves are members of obligations as per the Societies Act 2019-20 FORMS OF BUSINESS ORGANISATION 43 (7), it is difficult to maintain secrecy 2.5.1 Types of Cooperative about the operations of a cooperative Societies society. Various types of cooperative societies (iv) Government control: In return of based on the nature of their operations the privileges offered by the are described below: government, cooperative societies have to comply with several rules and (i) Consumer’s cooperative societies: regulations related to auditing of The consumer cooperative societies are accounts, submission of accounts, etc. formed to protect the interests of Interference in the functioning of the consumers. The members comprise of cooperative organisation through the consumers desirous of obtaining good control exercised by the state quality products at reasonable prices. cooperative departments also negatively The society aims at eliminating affects its freedom of operation. middlemen to achieve economy in (v) Differences of opinion: Internal operations. It purchases goods in bulk quarrels arising as a result of contrary directly from the wholesalers and sells viewpoints may lead to difficulties in goods to the members, thereby decision making. Personal interests eliminating the middlemen. Profits, if may start to dominate the welfare any, are distributed on the basis of either motive and the benefit of other their capital contributions to the society members may take a backseat if or purchases made by individual personal gain is given preference by members. certain members. Amul’s amazing Cooperative ventures! Every day Amul collects 4,47,000 litres of milk from 2.12 million farmers (many illiterate), converts the milk into branded, packaged products, and delivers goods worth Rs. 6 crore (Rs. 60 million) to over 5,00,000 retail outlets across the country. It all started in December 1946 with a group of farmers keen to free themselves from intermediaries, gain access to markets and thereby ensure maximum returns for their efforts. Based in the village of Anand, the Khera District Milk Cooperative Union (better known as Amul) expanded exponentially. It joined hands with other milk cooperatives, and the Gujarat network now covers 2.12 million farmers, 10,411 village level milk collection centres and fourteen district level plants (unions). Amul is the common brand for most product categories produced by various unions: liquid milk, milk powder, butter, ghee, cheese, cocoa products, sweets, ice-cream and condensed milk. Amul’s sub-brands include variants such as Amulspray, Amulspree, Amulya and Nutramul. Source: Adapted from Pankaj Chandra, “Rediff.com”, Business Special, September 2005. 2019-20 44 BUSINESS STUDIES (ii) Producer’s cooperative societies: products. The members consist of These societies are set up to protect the producers who wish to obtain interest of small producers. The reasonable prices for their output. The members comprise of producers society aims to eliminate middlemen desirous of procuring inputs for and improve competitive position of its production of goods to meet the members by securing a favourable demands of consumers. The society market for the products. It pools the aims to fight against the big capitalists output of individual members and and enhance the bargaining power of performs marketing functions like the small producers. It supplies raw transportation, warehousing, materials, equipment and other inputs packaging, etc., to sell the output at to the members and also buys their the best possible price. Profits are output for sale. Profits among the distributed according to each members are generally distributed on member’s contribution to the pool of the basis of their contributions to the output. total pool of goods produced or sold (iv) Farmer’s cooperative societies: by the society. These societies are established to (iii) Marketing cooperative societies: protect the interests of farmers by Such societies are established to help providing better inputs at a reasonable small producers in selling their cost. The members comprise farmers Indian Companies in League of FORTUNE GLOBAL Organisations GLOBAL Rank in Revenues Company Website rank India (Million$) Indian Oil Corporation Ltd. 161 1 54,711 www.iocl.com Reliance Industries Ltd. 215 2 43,437 www.ril.com Tata Motors Ltd. 226 3 42,092 www.tatamotors.com State Bank of India 232 4 41,681 www.sbi.co.in Bharat Petroleum 350 5 20,082 www.bharatpetroleum.in Corporation Ltd. Hindustan Petroleum 367 6 28,820 www.hindustanpetroleum.com Corporation Ltd. Rajesh Exports 423 7 25,237 www.rajeshindia.com Corporation Ltd. 2019-20 FORMS OF BUSINESS ORGANISATION 45 who wish to jointly take up farming 2.6 JOINT STOCK COMPANY activities. The aim is to gain the benefits A company is an association of persons of large scale farming and increase the formed for carrying out business ac- productivity. Such societies provide tivities and has a legal status indepen- better quality seeds, fertilisers, dent of its members. A company can machinery and other modern be described as an artificial person hav- techniques for use in the cultivation of ing a separate legal entity, perpetual crops. This helps not only in improving succession and a common seal. The the yield and returns to the farmers, company form of organisation is gov- but also solves the problems associated erned by The Companies Act, 2013. As with the farming on fragmented land per section 2(20) of Act 2013, a com- holdings. pany means company incorporated (v) Credit cooperative societies: under this Act or any other previous company law. Credit cooperative societies are The shareholders are the owners of established for providing easy credit the company while the Board of on reasonable terms to the members. Directors is the chief managing body The members comprise of persons who elected by the shareholders. Usually, seek financial help in the form of loans. the owners exercise an indirect control The aim of such societies is to protect over the business. The capital of the the members from the exploitation of company is divided into smaller parts lenders who charge high rates of called ‘shares’ which can be transferred interest on loans. Such societies provide freely from one shareholder to another loans to members out of the amounts person (except in a private company). collected as capital and deposits from the members and charge low rates Features of interest. The definition of a joint stock company (vi) Cooperative housing societies: highlights the following features of a Cooperative housing societies are company. established to help people with limited income to construct houses at (i) Artificial person: A company is a reasonable costs. The members of these creation of law and exists independent societies consist of people who are of its members. Like natural persons, desirous of procuring residential a company can own property, incur accommodation at lower costs. The aim debts, borrow money, enter into is to solve the housing problems of the contracts, sue and be sued but unlike members by constructing houses and them it cannot breathe, eat, run, talk giving the option of paying in and so on. It is, therefore, called an instalments. These societies construct artificial person. flats or provide plots to members on (ii) Separate legal entity: From the which the members themselves can day of its incorporation, a company construct the houses as per their choice. acquires an identity, distinct from its 2019-20 46 BUSINESS STUDIES members. Its assets and liabilities are officials for running the business. The separate from those of its owners. The directors hold a position of immense law does not recognise the business significance as they are directly and owners to be one and the same. accountable to the shareholders for the (iii) Formation: The formation of a working of the company. The company is a time consuming, expensive shareholders, however, do not have the and complicated process. It involves the right to be involved in the day-to-day preparation of several documents and running of the business. Previous Company law means any of the laws specified below: 1. Act relating to companies in force before the Indian companies Act, 1866 (10 of 1866). 2. The Indian companies Act, 1866 (10 of 1866). 3. The Indian companies Act, 1882 (6 of 1882). 4. The Indian companies Act, 1913 (6 of 1913). 5. The Registration of Transferred Companies Ordinance, 1942 (ordinance 42 of 1942). 6. The Companies Act, 1956. compliance with several legal (vi) Liability: The liability of the requirements before it can start members is limited to the extent of the functioning. Incorporation of companies capital contributed by them in a is compulsory under The Companies Act company. The creditors can use only the 2013 or any of the previous company assets of the company to settle their law, as state earlier. Such companies claims since it is the company and not which are incorporated under the members that owes the debt. The companies Act 1956 or any company law members can be asked to contribute to shall be included in the list of companies. the loss only to the extent of the unpaid (iv) Perpetual succession: A company amount of share held by them. Suppose being a creation of the law, can be Akshay is a shareholder in a company brought to an end only by law. It will holding 2,000 shares of Rs.10 each on only cease to exist when a specific which he has already paid Rs. 7 per procedure for its closure, called share. His liability in the event of losses winding up, is completed. Members or company’s failure to pay debts can may come and members may go, but be only up to Rs. 6,000 — the unpaid the company continues to exist. amount of his share capital (Rs. 3 per (v) Control: The management and share on 2,000 shares held in the control of the affairs of the company is company). Beyond this, he is not liable undertaken by the Board of Directors, to pay anything towards the debts or which appoints the top management losses of the company. 2019-20 FORMS OF BUSINESS ORGANISATION 47 (vii) Common seal: A company may into cash in case the need arises. or may not have a common seal. If a This avoids blockage of investment company has a common seal, it must and presents the company as a be affixed to the documents such as favourable avenue for investment agreements of a company. If a company purposes. does not have a common seal then the (iii) Perpetual existence: Existence of person signing the document should a company is not affected by the death, be authorised by a board’s resolutions. retirement, resignation, insolvency or (viii) Risk bearing: The risk of losses insanity of its members as it has a in a company is borne by all the share separate entity from its members. A holders. This is unlike the case of sole company will continue to exist even if proprietorship or partnership firm all the members die. It can be liquidated where one or few persons respectively only as per the provisions of the bear the losses. In the face of financial Companies Act, 2013. difficulties, all shareholders in a (iv) Scope for expansion: As company have to contribute to the compared to the sole proprietorship debts to the extent of their shares in and partnership forms of organisation, the company’s capital. The risk of loss a company has large financial thus gets spread over a large number resources. Further, capital can be of shareholders. attracted from the public as well as through loans from banks and financial Merits institutions. Thus there is greater scope The company form of organisation for expansion. The investors are offers a multitude of advantages, some inclined to invest in shares because of of which are discussed below. the limited liability, transferable (i) Limited liability: The shareholders ownership and possibility of high are liable to the extent of the amount returns in a company. unpaid on the shares held by them. (v) Professional management: A Also, only the assets of the company company can afford to pay higher can be used to settle the debts, leaving salaries to specialists and professionals. the owner’s personal property free from It can, therefore, employ people who any charge. This reduces the degree of are experts in their area of risk borne by an investor. specialisations. The scale of operations (ii) Transfer of interest: The ease in a company leads to division of work. of transfer of ownership adds to the Each department deals with a advantage of investing in a company particular activity and is headed by an as the share of a public limited expert. This leads to balanced decision company can be sold in the market making as well as greater efficiency in and as such can be easily converted the company’s operations. 2019-20 48 BUSINESS STUDIES Limitations (iii) Impersonal work environment: The major limitations of a company Separation of ownership and form of organisation are as follows: management leads to situations in which there is lack of effort as well as (i) Complexity in formation: The personal involvement on the part of formation of a company requires the officers of a company. The large greater time, effort and extensive size of a company further makes it knowledge of legal requirements and difficult for the owners and top the procedures involved. As compared management to maintain personal to sole proprietorship and partnership form of organisations, formation of a contact with the employees, company is more complex. customers and creditors. Pen is mightier than the Sword: The Case of Luxor Writing Instruments Pvt. Ltd. In the year 1963, a young gentleman armed with the power of hard work and ambition, started a new era in the field of writing instruments. At a tender age of 19, he started a small manual assembly shop in Sadar Bazaar area in Delhi where he manufactured fountain pens under the name Luxor Writing Instruments Pvt. Ltd. (LWIPL). Being awarded the coveted ‘Number One Writing Instruments Exporter’ award consecutively for three years, LWIPL has been given the exclusive rights of manufacturing and distributing four international brands in India, viz., Pilot, Papermate, Parker and Waterman. Luxor Writing Instruments Pvt. Ltd. has the largest share of this market of over 20 percent, with a turnover pushing way beyond the Rs. 150 crore mark. As of today Luxor is a leading manufacturer and exporter of writing instruments from India. It is currently exporting over 15 percent of the output and has four manufacturing facilities in New Delhi and three at Mumbai. It employs over 600 people. It is the leader in most segments of the market, manufacturing and distributing a wide variety of pens for various applications and needs. Source: http://www.luxorparker.com (ii) Lack of secrecy: The Companies Act (iv) Numerous regulations: The requires each public company to provide functioning of a company is subject to from time-to-time a lot of information to many legal provisions and compulsions. the office of the registrar of companies. A company is burdened with numerous Such information is available to the restrictions in respect of aspects general public also. It is, therefore, including audit, voting, filing of reports difficult to maintain complete secrecy and preparation of documents, and is about the operations of company. required to obtain various certificates 2019-20 FORMS OF BUSINESS ORGANISATION 49 from different agencies, viz., registrar, small percentage attend the general SEBI, etc. This reduces the freedom of meetings. The Board of Directors as operations of a company and takes away such enjoy considerable freedom in a lot of time, effort and money. exercising their power which they (v) Delay in decision making: sometimes use even contrary to the Companies are democratically managed interests of the shareholders. through the Board of Directors which is Dissatisfied shareholders in such a followed by the top management, middle situation have no option but to sell management and lower level their shares and exit the company. As management. Communication as well as the directors virtually enjoy the rights approval of various proposals may to take all major decisions, it leads to cause delays not only in taking rule by a few. decisions but also in acting upon them. (vii) Conflict in interests: There may (vi) Oligarchic management: In be conflict of interest amongst various theory, a company is a democratic stakeholders of a company. The institution wherein the Board of employees, for example, may be Directors are representatives of the interested in higher salaries, consumers shareholders who are the owners. In desire higher quality products at lower practice, however, in most large sized prices, and the shareholders want organisations having a multitude of higher returns in the form of dividends shareholders; the owners have and increase in the intrinsic value of minimal influence in terms of their shares. These demands pose controlling or running the business. problems in managing the company as It is so because the shareholders are it often becomes difficult to satisfy such spread all over the country and a very diverse interests. Table 2.3 Difference between a Public Company and Private Company Basis Public company Private company Minimum - 7 Minimum - 2 Members Maximum - unlimited Maximum - 200 Minimum number of Three Two directors Index of members Compulsory Not compulsory T ransfer of shares No restriction Restriction on transfer Can invite the public to Invitation to public to Cannot invite the public to subscribe to its shares or subscribe to shares subscribe to its securities debentures 2019-20 50 BUSINESS STUDIES 2.6.1 Types of Companies 4. A private company needs to have A company can be either a private or a only two directors as against the public company. These two types of minimum of three directors in the companies are discussed in detail in the case of a public company. However following paragraphs. the maximum number of directors for both types of companies is Private Company fifteen. A private company means a company 5. A private company is not required which: to keep an index of members while the same is necessary in the case (a) restricts the right of members to of a public company. transfer its shares; (b) has a minimum of 2 and a maximum Public Company of 200 members, excluding the present and past employees; A public company means a company (c) does not invite public to subscribe which is not a private company. As per to its securities and The Companies Act, a public company It is necessary for a private company is one which: to use the word private limited after its (a) has a minimum of 7 members and name. If a private company contravenes no limit on maximum members; any of the aforesaid provisions, it ceases (b) has no restriction on transfer to be a private company and loses all securities; and the exemptions and privileges to which (c) is not prohibited from inviting the it is entitled. public to subscribe to its securities. The following are some of the privileges However, a private company which is a of a private limited company as against subsidiary of a public company is also a public limited company: treated as a public company. 1. A private company can be formed by only two members whereas 2.7 C HOICE OF FORM OF BUSINESS seven people are needed to form a O RGANISATION public company. After studying various forms of 2. There is no need to issue a business organisations, it is evident that prospectus as public is not invited each form has certain advantages as well to subscribe to the shares of a as disadvantages. It, therefore, becomes private company. vital that certain basic considerations are 3. Allotment of shares can be done kept in mind while choosing an without receiving the minimum subscription. A private limited appropriate form of organisation. The company can start business as important factors determining the soon as it receives the certificate of choice of organisation are listed in Table incorporation. 2.4 and are discussed as follows: 2019-20 FORMS OF BUSINESS ORGANISATION 51 Table 2.4 Factors influencing the choice of form of Business Organisation Form of organisation Factor Most advantageous Least advantageous Availability of capital Company Sole proprietorship Cost of for mation Sole proprietorship Company Ease of for mation Sole proprietorship Company Company (except T ransfer of ownership Partnership private company) Managerial skills Company Sole proprietorship Regulations Sole proprietorship Company Flexibility Sole proprietorship Company Continuity Company Sole proprietorship Liability Company Sole proprietorship (i) Cost and ease in setting up the (ii) Liability: In case of sole o r g an i s a t i o n : As far as initial proprietorship and partnership firms, business setting-up costs are the liability of the owners/partners is concerned, sole proprietorship is the unlimited. This may call for paying the debt from personal assets of the owners. most inexpensive way of starting a In joint Hindu family business, only the business. H o w e v e r, t he legal karta has unlimited liability. In requirements are minimum and the cooperative societies and companies, scale of operations is small. In case of however, liability is limited and creditors partnership also, the advantage of less can force payment of their claims only legal formalities and lower cost is there to the extent of the company’s assets. because of limited scale of operations. Hence, from the point of view of Cooperative societies and companies investors, the company form of have to be compulsorily registered. organisation is more suitable as the risk Formation of a company involves a involved is limited. lengthy and expensive legal procedure. (iii) Continuity: The continuity of sole From the point of view of initial cost, proprietorship and partnership firms is therefore, sole proprietorship is the affected by such events as death, preferred form as it involves least insolvency or insanity of the owners. expenditure. Company form of However, such factors do not affect the organisation, on the other hand, is continuity of business in the case of more complex and involves greater organisations like joint Hindu family costs. business, cooperative societies and 2019-20  52 Table 2.5 Comparative Evaluation of Forms of Organisation Basis of Sole Joint Hindu Partnership Cooperative society Company comparison proprietorship family business Less legal Minimal legal Registration Registration is for malities, Registration compulsory, for malities, compulsory, For mation optional, exemption from lengthy and expensive easiest greater legal easy for mation registration, for mation process for mation for malities easy for mation At least two Minimum Private-2 persons for Public Company-7 Minimum-2 division of family At least 10 adults, Members Only owner Maximum Maximum: 50 property, no maximum limit Private Company-200 no maximum Public Company-unlimited limit Limited but more than that can be Capital Ancestral Limited finance raised in case of Limited Large financial resources contribution property sole proprietorship Unlimited (Karta), Unlimited and Liability Unlimited Limited (Other Limited Limited joint members) Partners take Owner takes all Elected decisions, Control and decisions, Karta takes representative, i.e., Separation between consent of all management quick decision decisions managing committee ownership and management partners is making takes decisions BUSINESS STUDIES needed Unstable, Stable More stable but business and business, Stable because of Stable because of separate Continuity affected by status owner regarded continues even if separate legal status legal status of partners as one karta dies 2019-20 FORMS OF BUSINESS ORGANISATION 53 companies. In case the business needs form may be suitable whereas for a permanent structure, company form medium and small sized business one is more suitable. For short term can opt for partnership or sole ventures, proprietorship or partnership proprietorship. Further, from the point may be preferred. of view of expansion, a company is more suitable because of its capability (iv) Management ability: A sole to raise more funds and invest in proprietor may find it difficult to have expertise in all functional areas of expansion plans. It is precisely for this purpose that in our opening case management. In other forms of organisations like partnership and Neha’s father suggested she should company, there is no such problem. consider switching over to the company Division of work among the members form of organisation. in such organisations allows the (vi) Degree of control: If direct control managers to specialise in specific over operations and absolute decision areas, leading to better decision making power is required, making. But this may lead to proprietorship may be preferred. But situations of conflicts because of if the owners do not mind sharing differences of opinion amongst people. control and decision making, Further, if the organisation’s partnership or company form of operations are complex in nature and organisation can be adopted. The require professionalised management, added advantage in the case of company form of organisation is a company form of organisation is that better alternative. Proprietorship or there is complete separation of partnership may be suitable, where ownership and management and it is simplicity of operations allow even professionals who are appointed to people with limited skills to run the independently manage the affairs of business. Thus, the nature of a company. operations and the need for (vii) Nature of business: If direct professionalised management affect personal contact is needed with the the choice of the form of organisation. customers such as in the case of a (v) Capital considerations: Companies grocery store, proprietorship may be are in a better position to collect large more suitable. For large manufacturing amounts of capital by issuing shares units, however, when direct personal to a large number of investors. contact with the customer is not Partnership firms also have the required, the company form of advantage of combined resources of all organisation may be adopted. Similarly, partners. But the resources of a sole in cases where services of a professional proprietor are limited. Thus, if the nature are required, partnership form is scale of operations is large, company much more suitable. 2019-20 54 BUSINESS STUDIES It would not be out of place to run on a small scale might not be mention here that the factors stated appropriate when the same business above are inter-related. Factors like is carried on a large scale. It is, capital contribution and risk vary with therefore, suggested that all the relevant the size and nature of business, and factors must be taken into hence a form of business organisation consideration while making a decision that is suitable from the point of view with respect to the form of organisation of the risks for a given business when that should be adopted. Key Terms Sole proprietorship Partnership Joint Hindu Family Mutual agency Cooperative Societies Joint Stock Company Perpetual succession Artificial person Holding company Co-parceners Incorporation of a Company SUMMARY Forms of business organisation refers to the types of organisations which differ in terms of ownership and management. The major forms of organisation include proprietorship, partnership, joint Hindu family business, cooperative society and company. Sole proprietorship refers to a form of organisation where business is owned, managed and controlled by a single individual who bears all the risks and is the only recipient of all the profits. Merits of this form of organisation include quick decision making, direct incentive, personal satisfaction, and ease of formation and closure. But this form of organisation suffers from limitations of limited resources, unstable life span of business, unlimited liability of sole proprietor and his/her limited managerial ability. Partnership is defined as an association of two or more persons who agree to carry on a business together and share the profits as well as bear risks collectively. Major advantages of partnership are: ease of formation and closure, benefits of specialisation, greater funds, and reduction of risk. Major limitations of partnership are unlimited liability, possibility of conflicts, lack of continuity and lack of public confidence. As there are different types of partners such as active, sleeping, secret and nominal partners; so is the case with types of partnerships which can vary from general partnership, limited partnership, partnership at will to particular partnership. 2019-20 FORMS OF BUSINESS ORGANISATION 55 Joint Hindu family business is a business owned and carried on by the members of a Hindu Undivided Family, which is governed by the Hindu law. Karta — the oldest male member of the family — controls the business. The strong points of joint Hindu family business include effective control, stability in existence, limited liability and increased loyalty among family members. But this form of organisation too suffers from certain limitations such as limited resources, lack of incentives, dominance of the karta and limited managerial ability. A cooperative society is a voluntary association of persons who get together to protect their economic interests. The major advantages of a cooperative society are equality in voting, members’ limited liability, stable existence, economy in operations, support from government, and ease of formation. But this form of organisation suffers from weaknesses such as limited resources, inefficiency in management, lack of secrecy, government control, and differences among members in regard to the way society should be managed and organised. Based on their purpose and nature of members, various types of societies that can be formed include: consumers cooperative society, producers cooperative society, marketing cooperative society, farmers cooperative society, credit cooperative society, and cooperative housing society. A company, on the other hand, may be defined as an artificial person, existing only in the eyes of the law with perpetual succession and having a separate legal identity. While major advantages of a company form of organisation are members’ limited liability, transfer of interest, stable existence, scope for expansion, and professional management; its key limitations are: complexity in formation, lack of secrecy, impersonal work environment, numerous regulations, delay in decision making, oligarchic management, and conflict of interests among different shareholders. Companies can be of two types — private and public. A private company is one which restricts transfer of shares and does not invite the public to subscribe to its securities. A public company, on the other hand, is allowed to raise its funds by inviting the public to subscribe to its securities. Furthermore, there is a free transferability of securities in the case of a public company. Choice of form of organisation: Selection of an appropriate form of organisation can be made after taking various factors into consideration. Initial costs, liability, continuity, capital considerations, managerial ability, degree of control and nature of business are the key factors that need to taken into account while deciding about the suitable form of organisation for one’s business. 2019-20 56 BUSINESS STUDIES EXERCISES Multiple Choice Questions Tick the appropriate answer 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 2. The karta in Joint Hindu family business has (a) Limited liability (b) Unlimited liability (c) No liability for debts (d) Joint liability 3. In a cooperative society the principle followed is (a) One share one vote (b) One man one vote (c) No vote (d) Multiple votes 4. The board of directors of a joint stock company is elected by (a) General public (b) Government bodies (c) Shareholders (d) Employees 5. Profits do not have to be shared. This statement refers to (a) Partnership (b) Joint Hindu family business (c) Sole proprietorship (d) Company 6. 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 7. The Head of the joint Hindu family business is called (a) Proprietor (b) Director (c) Karta (d) Manager 8. Provision of residential accommodation to the members at reasonable rates is the objective of (a) Producer’s cooperative (b) Consumer’s cooperative (c) Housing cooperative (d) Credit cooperative 9. A partner whose association with the firm is unknown to the general public is called (a) Active partner (b) Sleeping partner (c) Nominal partner (d) Secret partner 2019-20 FORMS OF BUSINESS ORGANISATION 57 Short Answer Questions 1. Compare the status of a minor in a Joint Hindu family business with that in a partnership firm. 2. If registration is optional, why do partnership firms willingly go through this legal formality and get themselves registered? Explain. 3. State the important privileges available to a private company. 4. How does a cooperative society exemplify democracy and secularism? Explain. 5. What is meant by ‘partner by estoppel’? Explain. 6. Briefly explain the following terms in brief. (a) Perpetual succession (b) Common seal (c) Karta (d) Artificial person Long Answer Questions 1. What do you understand by a sole proprietorship firm? Explain its merits and limitation? 2. Why is partnership considered by some to be a relatively unpopular form of business ownership? Explain the merits and limitations of partnership. 3. Why is it important to choose an appropriate form of organisation? Discuss the factors that determine the choice of form of organisation. 4. Discuss the characteristics, merits and limitation of cooperative form of organisation. Also describe briefly different types of cooperative societies. 5. Distinguish between a Joint Hindu family business and partnership. 6. Despite limitations of size and resources, many people continue to prefer sole proprietorship over other forms of organisation? Why? Application Questions 1. In which form of organisation is a trade agreement made by one owner binding on the others? Give reasons to support your answer. 2. The business assets of an organisation amount to Rs. 50,000 but the debts that remain unpaid are Rs. 80,000. What course of action can the creditors take if (a) The organisation is a sole proprietorship firm (b) The organisation is a partnership firm with Anthony and Akbar as partners. Which of the two partners can the creditors approach for repayment of debt? Explain giving reasons 2019-20 58 BUSINESS STUDIES 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. (a) Explain two benefits of remaining a sole proprietor (b) Explain two benefits of converting to a joint stock company (c) What role will her decision to go nationwide play in her choice of form of the organisation? (d) What legal formalities will she have to undergo to operate business as a company? Projects/Assignments Divide students into teams to work on the following (a) To study the profiles of any five neighbourhood grocery/stationery store (b) To conduct a study into the functioning of a Joint Hindu family businesses (c) To enquire into the profile of five partnerships firms (d) To study the ideology and working of cooperative societies in the area (e) To study the profiles of any five companies (inclusive of both private and public companies) Notes 1. Some of the following aspects can be assigned to the students for undertaking above mentioned studies. Nature of business, size of the business measured in terms of capital employed, number of persons working, or sales turnover, problems faced, Incentive, reason behind choice of a particular form, decision making pattern, willingness to expand and relevant considerations, Usefulness of a form, etc. 2. Students teams should be encouraged to submit their findings and conclusions in the form of project reports and multi-media presentations. 2019-20