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Chapter 2: Forms of Business Organisation
If one is planning to start a business or is interested in expanding an existing one, an important decision relates to the choice of the form of organization.
The most appropriate form is determined by weighing the advantages and disadvantages of each type of organization against one’s own requirements.
Various forms of business organizations from which one can choose the right one include: (a) Sole proprietorship, (b) Joint Hindu family business, (c) Partnership, (d) Cooperative societies, and (e) Joint-stock company.
Let us start our discussion with sole proprietorship—the simplest form of business organization, and then move on to analyzing more complex forms of organizations.
2.2 Sole Proprietorship Do you often go in the evenings to buy registers, pens, chart papers, etc., from a small neighborhood stationery store? Well, in all probability in the course of your transactions, you have interacted with a sole proprietor.
A sole proprietorship is a popular form of business organization and is the most suitable form for small businesses, especially in their initial years of operation.
Sole proprietorship refers to a form of business organization that is owned, managed, and controlled by an individual who is the recipient of all profits and bearer of all risks. This is evident from the term itself.
The word “sole” implies “only”, and “proprietor” refers to “owner”. Hence, a sole proprietor is one who is the only owner of a business.
This form of business is particularly common in areas of personalized services such as beauty parlors, hair salons, and small-scale activities like running a retail shop in a locality. the owner is personally responsible for the payment of debts in case the assets of the business are not sufficient to meet all the debts.
As such the owner’s personal possessions such as his/her personal car and other assets could be sold for repaying the debt.
Suppose the total outside liabilities of XYZ dry cleaner, a sole proprietorship firm, is Rs. 80,000 at the time of dissolution, but its assets are Rs. 60,000 only.
In such a situation the proprietor will Features Salient characteristics of the sole proprietorship form of organization as follows: (i) Formation and closure: There is no separate law that governs sole proprietorship.
Hardly any legal formalities are required to start a sole proprietary business, though in some cases one may require a license. Closure of the business can also be done easily.
Thus, there is the ease in formation as well as the closure of business. (ii) Liability: Sole proprietors have unlimited liability.
This implies that have to bring in Rs. 20,000 from her personal sources even if she has to sell her personal property to repay the firm’s debts. (iii) Sole risk bearer and profit recipient: The risk of failure of a business is borne all alone by the sole proprietor.
However, if the business is successful, the proprietor enjoys all the benefits. He receives all the business profits which become a direct reward for his risk bearing.
(iv) Control: The right to run the business and make all decisions lies absolutely with the sole proprietor. He can carry out his plans without any interference from others.
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NCERT Solutions Class 11 Business Studies Chapter 2 Forms of Business Organisation NCERT Textbook PDF
1. Compare the status of a minor in a Joint Hindu Family Business with that in a partnership firm.
According to Indian Law, a person of 18 years of age is said to be a minor. In a Joint Hindu family, a minor becomes a part of the family business by virtue of taking birth in the family. The minor gets equal ownership and right over the property and business like other family members. But, he has limited liability only up to his share in the property.
In a partnership firm, a minor cannot become a partner as mentioned by the Indian Partnership Act, 1932.
But if all the partners of a firm give their consent, a minor can be inducted and he can share the profits of the firm, but a minor need not contribute capital or bear any liability if it is sustained by the business.
Minors are not considered to be partners. But, after attaining 18 years, he/she can continue the partnership or withdraw the same.
2. If registration is optional, why do partnership firms willingly go through this legal formality and get themselves registered? Explain.
Registration in the case of a partnership is not mandatory, but it is better to get it registered as there are many negative points of not doing registration. Some points are highlighted:
1. Partners of a firm that is not registered cannot file a case against a third party, however, other firms can seek legal action against the firm even though it is not registered.
2. A non-registered firm cannot book a case against its partner or partners and a partner also cannot do the same against the firm.
3. Claims cannot be enforced against a third party in a court of law.
3. State the important privileges available to a private company.
Following are the privileges that are enjoyed by a private company:
1. A private company can be started by 2 members while minimum of 7 persons are necessary to start a public company.
2. Two directors are enough for running operations in a private company while a minimum of 3 is required in a public company
3. A private company can start a business from the day of receiving a certificate of incorporation. But, a public company has to obtain two certificates namely, a certificate of commencement and a certificate of incorporation for starting a business
4. How does a cooperative society exemplify democracy and secularism? Explain.
A cooperative society is managed by people who are selected by all the members through voting. Each member has an equal right to vote irrespective of the capital they have invested.
Thus, it acts as a democracy where all members are treated equally and provides equal rights to all members. Also, there is no discrimination against members based on their caste, religion, or sex. All members are free to choose members of the managing committee who they feel are best to represent them. Therefore, it signifies secularism.
5. What is meant by ‘partner by estoppel’? Explain.
Partner by estoppel is referred to as that person who through his/her action, behavior or words gives the impression to others that he/she is a partner of that particular firm. Such type of partner is not a partner and is not liable to contribute any capital in the firm nor is he/she a part of any profit or loss of firm.
But, the same person will be held liable for the debts that the firm owes. And as such for repaying debts can be made by selling off the private assets of the partner by estoppel in case the firm has insufficient assets or funds.
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