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Question-1

What are the different forms of organizations?

Solution:
The forms of business organizations from which one can decide the right one include:

(a) Sole proprietorship,

(b) Joint Hindu family business,

(c) Partnership,

(d) Cooperative societies, and

(e) Joint stock company.

Question-2

What do you mean by sole proprietorship?

Solution:
The word “sole” implies “only”, and “proprietor” refers to “owner”.

Hence, a sole proprietor can be addressed as the only owner of a business.

This form of business is mostly common in areas of personalized services namely, setting up of beauty parlours, hair saloons and small scale activities like operating a retail shop in a locality.

Question-3

Write short notes on Joint Hindu Family Business.

Solution:
Joint Hindu Family Business

In Hindu religion, Joint family business, a particular form of business organization

found only in India which is considered as one of the oldest form of business organization in the country. It refers to the kind of organization in which the business is owned and run by the members of the Hindu Undivided Family (HUF). It is bound by the Hindu Law. The origin of membership in the business is birth in a particular family and falling under three successive generations who can be nominated as members in the business. The business is under the control of the head of the family who is the eldest member named karta. All members are entitled for equal ownership right over the property of an ancestor and they are known as co-parceners.

The family business is of two types: Dayabhaga and Mitakashara Systems. Dayabhaga system that exists in West Bengal allows both the male and female members of the family to be co-parceners. On the other hand, the Mitakashara system, exists all over India except West Bengal and allows merely the male members to be co-parceners in the business.

Question-4

Show in a tabular column the contribution of each type of partner in the management, sharing of profits / losses and liability.

Solution:

Category

Contribution of Capital

Management

Share of profit / Loss

Liability

Active partner

participates

Shares profits/losses

Unlimited

Sleeping or Dormant

Does not participate

Shares profits/losses

Unlimited

Secret

Participates, but secretly

Shares profits/losses

Unlimited

Nominal

x

Does not participate

Generally does not share profits / losses

Unlimited

Partner by estoppel

x

Does not participate

Does not share profits / losses

Unlimited

Partner by holding out

x

Does not participate

Does not share profits / losses

Unlimited

 

Question-5

Write short notes on the types of partners.

Solution:
Types of Partners
A partnership firm can have various kinds of partners with dissimilar roles and liabilities. A thorough knowledge of these types of partnerships firms, their rights and responsibilities are needed. These are described as follows:

 

(i) Active Partner: An active partner is the person who contributes capital, participates in the management of the organisation, shares its profits gained and losses incurred and is liable to an unlimited extent to the creditors of the firm. These partners play a genuine part in carrying out business of the firm on behalf of other partners.

 

(ii) Sleeping or Dormant Partner: Partners who do not attend to the day. Today activities of the business are known as sleeping partners. A sleeping partner, on the other hand, contributes capital to the firm, shares its profits and losses, and has unlimited liability.

 

(iii) Secret Partner: A secret partner is the person whose association with the firm is not known to the general public. Other than this distinct feature, in all other aspects he assumes the role of rest of the partners. He contributes to the capital of the firm, takes part in the management, shares its profits and losses, and has unlimited liability towards the creditors.

(iv) Nominal Partner: A nominal partner is the person who allows the use of his/her name by the organization, but does not contribute to its capital. He/she does not actively participate in managing the firm and does not share its profit or losses but is liable, like other partners, to the third parties, with respect to repayments of the firm’s debts.

 

(v) Partner by Estoppels: A person is considered as a partner by estoppels if, by his/her own initiative, conduct or behaviour, he/she gives an impression to others that he/she is a partner of the firm. These partners are liable for the debts of the firm since according to the third party they are considered partners, although they do not put in capital or there is absence of participation in the activities of the management.

 

(vi) Partner by Holding Out: A partner by ‘holding out’ is an identified as a person who though not a partner in a firm, is knowingly allowing himself/herself to be represented as a partner in a firm. This person becomes liable to outside creditors for repayment of any debts which have been allotted to the firm on the basis of such representation. If he is not really a partner and wants to save himself from such a liability, he should instantaneously issue a denial, clarifying his position that he is not a partner in the organization. If he does not do so, he will be responsible to the third party for any such debts.

Question-6

Write short notes on the partnership deed.

Solution:
Partnership Deed

A partnership is defined as a voluntary association of people who come together for procuring common objectives. Entering into partnership requires a clear agreement with respect to the terms, conditions and all aspects regarding the partners so that to avoid misunderstanding among the partners in future. This agreement can be oral or written. Although it is not essential to have a written agreement.

It is better to have a written agreement as it serves as an evidence of the conditions agreed upon. This written agreement that specifies the terms and conditions and governs the partnership is called the partnership deed. This partnership deed generally includes the following aspects:

Name of organization
  Type of business and location of business
  Time Duration of business
  Capital investment made by each partner
  Sharing of profits and losses
  Allocation of Duties and obligations of the partners
  Withdrawals and Salaries of the partners
  Terms involved in admission, retirement and expulsion of a Partner
  Interest on capital and drawings
  Procedure for dissolution of the organization
  Preparation of accounts and conducting an audit for the same
  Ways to solve disputes

 

Question-7

How is registration important in a partnership firm?

Solution:
Registration

Entering of the firm’s name, along with the relevant prescribed particulars,

In the Register of firms kept with the Registrar of Firms is called Registration. It gives conclusive proof of the existence of a partnership firm. Registration of a Partnership firm is optional. However, the firm will be deprived of many benefits. The consequences of non-registration of a firm are as follows:

(a) It is not possible for a partner of an unregistered firm to file a suit against the firm or other partners,

(b) It is not possible for the firm to file a suit against third parties, and

(c) It is not possible for the firm to file a case against the partners.

Due to these consequences, it is advisable to have the firm registered. As per the Indian Partnership Act 1932, the partners can register with the Registrar of firms of the state in which the firm is located. The registration can be done at the time of formation or at any time during its survival. The procedure for registering a firm is as follows:

1. The application has to be submitted in the prescribed format to the Registrar of firms. The application should contain the following particulars:

Name of the firm
  Location of the firm
  Names of other places where business is carried on by the firm
  The date of joining of each partner in the firm
  Names and addresses of the partners
  Duration of partnership

This application should be duly signed by all the partners.

2. Deposit of necessary fees with the Registrar of Firms.

3. The Registrar on approval will make an entry in the register of firms and will subsequently issue a certificate of registration.

Question-8

Write short notes on Co-operative societies.

Solution:
Cooperative Society

The word cooperative suggests working together and with others for a common objective. The cooperative society can be defined as a voluntary association of persons, who join together with the objective of welfare of the members. They are motivated by the need to protect their economic interests in the face of possible exploitation at the hands of middlemen preoccupied with the desire to earn greater profits. The cooperative society is mandatory required to be registered under the Cooperative Societies Act 1912. The process of setting up of a cooperative society is very simple and requires the consent of at least ten adult persons to form a society. The capital of a society is raised from its members through issuance of shares. It acquires a distinct legal identity after its registration.

Question-9

What is a private company and what are its advantages?

Solution:
Private Company

A private company is one if it satisfies the following:

a) restricts the right to transfer of shares by its members.

b) it should have a minimum of two people and a maximum of 50 members which does not include the past and present employees.

c) he public is not invited to subscribe to its share capital

d) should have a minimum paid up capital of Rs 1 lakh or any amount that has been prescribed regularly.

The words private limited that is to be added after its name is a compulsory affair. A company loses its private company hold if any of the above mentioned provisions are not complied with.

 

The following are the advantages of private companies when compared to the public companies:

1) Two members are enough for the private company whereas seven people are required for a public company.

2) Prospectus need not be issued because the public I not invited to subscribe the shares of a private concern.

3) The minimum subscription is not mandatory for the allotment o shares.

4) The private company an commence business as soon as it receives the certificate of incorporation whereas the public company has to wait till the certificate of commencement.

5) The private company needs two directors whereas the public company requires a minimum of three.

6) A directory of employees has to be maintained by the private company while this is not mandatory for a public company.

7) The directors are not restricted with the amount of loan they can borrow in a private company. As a result of this, they nee not get permission from the Government which the public company has o follow.

Question-10

What is a public company and what its merits?

Solution:
Public Company

A company which is not a private company is called a public company. The Indian Companies Act defines a Public Company as follows

(a) which has a minimum paid up capital of Rs. 5 lakh or more an which can be recommended from time-to-time.

(b) a minimum of 7 members and without a limit for the maximum number

(c) transfer of shares is not restricted

(d) does not prohibit the public from subscribing to its public deposit or share capital

Question-11

What is sole proprietorship, explain its features, merits and demerits.

Solution:
The word “sole” implies “only”, and “proprietor” refers to “owner”.

Hence, a sole proprietor can be addressed as the only owner of a business.

This form of business is mostly common in areas of personalized services namely, setting up of beauty parlours, hair saloons and small scale activities like operating a retail shop in a locality.

 

Features

Most important features of sole proprietorship form of organization are as follows:

 

(i) Formation and Closure: Barely, any legal formalities are required to set up a sole proprietary business, though in certain cases one may need a license. There is no separate law that governs sole proprietorship. Dissolution of the business is also done easily. Thus, there is no difficulty in formation as well as closure of business.

 

(ii) Liability: Sole proprietors have limitless liability. This implies that the owner is personally responsible for the business payment of over dues or debts in case the assets of the organization. The business is not adequate to meet all the debts. At this instance, the owner’s individual possessions such as his/her personal car and other belongings may have to be sold for repaying the debt. For instance, the total outside liabilities of XYZ , a sole proprietorship organization are Rs. 80,000 at the time of closure, but its assets are Rs. 60,000 only. In this situation the proprietor has to put in Rs. 20,000 from his/her personal sources even by selling her personal assets to repay the firm’s debts.

 

(iii) Sole Risk Bearer and Profit Recipient: The risk of collapse of business is borne solely by the proprietor. Nevertheless, the business is successful, the proprietor is entitled to enjoy all the benefits. He is the recipient of all the profits derived from his business which is a direct reward for bearing the risk factor.

 

(iv) Control: The authority to run the business and the decision-making lies entirely with the sole proprietor. He can accomplish his plans without anybody’s intervention.

 

(v) No Separate Entity: In the eyes of the law, no difference is seen between the sole trader and his business, as business there is no identity. Sole trader is a form of business entity where a person is solely accountable for providing the capital, to bear risk of the enterprise and the administration of business. The sole proprietorship is a type of business organization where the head of the organization is an individual who is accountable, responsible, directs its operations and who alone runs the risk factor. Detach from the owner. The owner is, therefore, answerable for all the activities of the business.

 

(vi) Lack of Business Continuity: As the owner and business are one and the same entity, death, insanity, imprisonment, physical ailment or bankruptcy of the sole proprietor will have an unswerving and negative effect on the business and may even cause closure of the business. consult others. This may lead to well-timed capitalisation of market opportunities as and when they arise.

 

Merits

(i) Quick Decision Making: A sole proprietor enjoys substantial degree of freedom in making business decisions. In addition, the decision is made at the appropriate time because there is no need to hold up as his/her efforts as he/she is the sole recipient of all the proceeds. There is no need to share the profits as he/she is the single proprietor. Hence, this provides utmost incentive to the sole trader to work intensely.

 

(ii) Confidentiality of Information: Sole decision making power enables the proprietor to keep all the information associated to business operations a secret and uphold confidentiality. A sole trader is certainly not bound by law to publish the organization’s financial records.

 

(iii) Direct Incentive Merits: A sole proprietor unswervingly reaps the benefits sole proprietorship offers numerous advantages. Some of the vital key points are as follows:

 

(iv) Sense of Accomplishment: There is a personal fulfillment implicated in working for oneself. The fact that one is responsible for the accomplishment.

(v) Ease of Formation and Closure: There are very few or minimal legal formalities as far as sole proprietorship is concerned since they are not governed by any special law. The owner can start and close his company as and when he desires.

Limitations

There are limitations to sole proprietorship and they are as follows:

(a) Limited Resources: The resources are limited to the level of money saved and borrowed by the proprietor and not more than that. Banks and other lending institutions hesitate to lend to sole proprietors and this may be the reason as to why the business remains small and with less growth.

(b) Limited Life of the Business: Death or insolvency from the proprietor leads to the business being closed since as per the law.

(c) Unlimited Liability: The liability of the business lies with the owner and it is unlimited. The assets of the business as well as the personal assets of the owner are considered by the creditors. The financial burdens falls on the owner totally forcing him not to be a high risk taker or a decision to expand.

(d) Limited Ability to Manage: The owner is responsible for all managerial activity such as purchasing, selling, financing etc. No individual can be proficient in all the fields. Due to the shortage of resources, there may be constraints from the owner's side to recruit talented people.

Though there may be certain limitations, we can find sole proprietors in business due to the advantages and less capital. This is suitable for business done on a small scale.

Question-12

What is Joint Hindu Family Business and explain in detail about its features, merits and demerits.

Solution:
Joint Hindu Family Business

 

In Hindu religion, Joint family business, a particular form of business organization

found only in India which is considered as one of the oldest form of business organization in the country. It refers to the kind of organization in which the business is owned and run by the members of the Hindu Undivided Family (HUF). It is bound by the Hindu Law. The origin of membership in the business is birth in a particular family and falling under three successive generations who can be nominated as members in the business. The business is under the control of the head of the family who is the eldest member named karta. All members are entitled for equal ownership right over the property of an ancestor and they are known as co-parceners.

The family business is of two types: Dayabhaga and Mitakashara Systems. Dayabhaga system that exists in West Bengal allows both the male and female members of the family to be co-parceners. On the other hand, the Mitakashara system, exists all over India except West Bengal and allows merely the male members to be co-parceners in the business.

Features

The points highlighted below are the important characteristics of the Joint Hindu family business. Two systems which governs membership in the family business, are Dayabhaga and Mitakashara.

 

(i) Formation: In order to form a joint Hindu family business, there ought to be at least two members in the family and ancestral

 

(ii) Liability: The liability of all members excluding the karta is limited to their share of co-parcenery assets of the business. The karta, on the other hand, has unlimited liability.

 

(iii) Control: The management of the family business and the decision making authority is bestowed on the karta. The other members of the family are bound by his decisions.

 

(iv) Continuity: There is continuity of business even after the demise of the karta. The next eldest member of the family takes up the position of karta, thereby stabilizing the business. On the controversy, the business can also be terminated with the mutual consent of the members of the family.

 

(v) Minor Members: Additional members can be included into the business which occurs at birth in a Hindu Undivided Family. Hence, minors can also be members and legal hiers of the business.

 

Merits

The benefits of the joint Hindu family business are as follows:

 

(i) Effective Control: The decision making power lies in the hands of the karta which helps avoid conflicts among members as nobody has the authority to interfere with his right to decide. This also leads to appropriate and flexible decision making.

 

(ii) Continued Business Existence: The demise of the karta does not have an effect on the business as the next eldest member will take up the position. Therefore, operations are not terminated and there is no threaten to the continuity of business.

 

(iii) Limited Liability of Members: The liability of all the co-parceners excluding the karta is limited to their share in the business, and accordingly their risk is well-defined and precise.

 

(iv) Increased Loyalty and Cooperation: As the business is run by the members within the family, there is a great sense of loyalty towards each other. The members take pride in the growth of business associated with the achievements of the family, that leads to better cooperation from all the members.

 

Limitations

The following are some of the limitations of a joint Hindu family business:

 

(i) Limited Resources: The common problem faced by the joint Hindu family is of limited capital, which is largely dependant on the ancestral property and throws limits for growth or expansion of business.

 

(ii) Unlimited Liability of Karta: The karta is not only loaded with the responsibility of decision making and running the business, but also distressed due to unlimited liability. The business debts can be repaid using his personal property.

 

(iii) Dominance of Karta: The family members might sometimes oppose the decisions of karta. This may create conflicts amongst the members and may even lead to loss of control and split in the family unit.

 

(iv) Limited Managerial Skills: Given that the karta cannot be a specialist in all areas of management, the business might suffer due to his unwise decisions. His incapability in decision making may lead to meager profits or sometimes even losses for the organisation. The joint Hindu family business is on the decline because of the diminishing number of joint Hindu Families in the country.

Question-13

Write in detail about partnership, its features, merits and demerits.

Solution:
Partnership

 

In sole proprietorship, due to the inherent disadvantage of financing, managing and expanding business paved way for partnership as a feasible option as a result Partnership served an answer to the greater needs of capital investment, wide-ranging skills and the risks were also mutually shared among the partners.

The Indian Partnership Act of 1932 defines Partnership as “the relation between persons who have agreed to share profit of the business carried on by all or any one of them acting for all”.

 

Features

The above definitions point out the following vital characteristics of the partnership form of business organisation. Jointly, all the partners shoulder the responsibility of repaying the debts by contributing a proportion to their share in business and are liable to that extent. Individually too, each partner can be held responsible in repaying the debts incurred by the business. Nevertheless, such a partner can also recover from other partners an amount of money corresponding to the shares in liability defined as per the partnership agreement. Partnership is the relationship between persons who are competent to make contracts and have agreed to carry on a lawful business in common with a view of individual gain.

 

Partnership is the relation which sustains between persons who have agreed upon to combine their property, labour or skill in some business and to share the profits there from between them.

 

(i) Formation: The partnership form of business organisation is governed by the Indian Partnership Act, 1932. It is accomplished through a legal agreement wherein the terms and conditions governing the relationship between the partners, sharing of profit and loss, the mode of conducting the business are precise. It is pointed out that the business must be legal and run with the objective of profit. Thus, two people coming jointly for charitable purposes will not comprise a partnership.

 

(ii) Liability: The partners of an organization have unlimited liability. Personal property and belongings can be used for repaying debts in case the business assets are scarce. Further, the partners are jointly and individually liable for payment of debts.

 

(iii) Risk Bearing: The risk in the business is borne by the partners. The profit and loss they earn for the risk taken is shared by the partners depending upon their contribution in capital.

 

(iv) Decision Making and Control: The responsibility of decision making lies in the hands of the partners for all kinds of activities. The joint effort of the partners help them in running the business.

 

(v) Continuity: If any partner turns insolvent, insane or passes away, the partnership does not break. If the other partners wish to continue, they may do so but after preparing a new agreement between themselves.

 

(vi) Membership: The minimum number of people required to open a partnership firm is two, for banks it is ten and for other businesses, it is twenty.

 

(vii) Mutual Agency: In partnership each person is the principal and the agent. One partner is the agent when the others are principal an d vice versa.

 

Merits

The following are the merit of partnership an they are as follows:

 

(a) Easy while it is Opened and Closed: To form a partnership firm is very easy. One has to just sign in an agreement by the partners who wish to begin the firm in which they agree to share the capital, profit/loss and not to mention the risks associated with it. Registering the same is not mandatory.

 

(b) Balanced Decision Making: The partners can manage almost all the activities of the firm since each one will be specialized in each activity. Since the job is divided, there is very chance for errors as well as reduce their burden. This leads to a balanced decision making.

 

(c) More Funds: There are many people to contribute in a partnership an thi is useful in raising huge amount as capital. This feature is absent in a sole proprietorship.

 

(d) Risk Sharing: The risk is shared by the partners and reduces the anxiety, trouble and their anxiety.

 

(e) Secrecy: It is not mandatory for the partnership firms to publish their accounts or submit the reports. So they can maintain their operations in utter secrecy.

 

Limitations

Though there are many advantages for the partnership firms, there are certain drawbacks as well and they are as follows:

 

1. Unlimited Liability: In case the business assets are not sufficient for the partners, they are in a position to give away their personal assets to clear off their debt. The liability of partners is both joint an several and is a problem for those partners who have immense wealth.

 

2. Limited Resources: There is a restrictions as to the number of partners and so the investment is not enough for business to be performed on a large scale. So partnerships cannot expand beyond a specific level.

 

3. Possibility of Conflicts: Since partnership deals with many partners, a conflict arises due to difference of opinion between them. Not all partners agree to the decisions made and sometime the conflict might also occur when the decision of a partner ruins their financial position.

 

4. Lack of Continuity: Partnership comes to an end due to the death or insolvency or death of a partner. Alternatively, a fresh agreement can bind the remaining partners.

 

5. Lack of Public Confidence: Its is not mandatory for a partnership firm to reveal its financial positions to the public. This puts the public in the dark about their financial position. This does not bring the people look up at partnership.

Question-14

Write about the co-operative societies, its features, merits, demerits and the types of co-operative societies in detail.

Solution:
Cooperative Society

The word cooperative suggests working together and with others for a common objective. The cooperative society can be defined as a voluntary association of persons, who join together with the objective of welfare of the members. They are motivated by the need to protect their economic interests in the face of possible exploitation at the hands of middlemen preoccupied with the desire to earn greater profits. The cooperative society is mandatory required to be registered under the Cooperative Societies Act 1912. The process of setting up of a cooperative society is very simple and requires the consent of at least ten adult persons to form a society. The capital of a society is raised from its members through issuance of shares. It acquires a distinct legal identity after its registration.

 

Features

The main features of a cooperative society are listed below:

 

(i) Voluntary Membership: Membership of a cooperative society is voluntary. A person can join a cooperative society, and can also leave the society, anytime as per his will. There is no compulsion for a person to join or quit a society. Although as per procedure, a member is required to give a notice before leaving the society, he is not forced to remain a member. Membership is open to all, irrespective of their religion, caste, and gender.

 

(ii) Legal Status: Registration of a cooperative society is mandatory. This allocates a separate identity to the society that is distinct from its members. This society can therefore enter into contracts thereby, hold property in its name, sue and be sued by others. Being a separate legal entity, it is not affected by the joining or withdrawal of its members.

 

(iii) Limited Liability: The liability of the members of a cooperative society is limited to the extent of the amount invested by them as capital. This holds the maximum risk a member can bear.

 

(iv) Control: In a cooperative society, the power of decision making lies in the hands of an elected managing committee. They have the right to vote that gives the members a chance to choose the members who can constitute the managing committee which lends the cooperative society a democratic character.

 

(v) Service Motive: The cooperative society through its objectives lays emphasis on the values of mutual aid and welfare. Therefore, the motive of service dominates its working. In the case of surplus being generated due of its operations, it is distributed amongst the members as dividend in compliance with the bye-laws of the society. Cooperative is a form of organisation in which persons voluntarily associate themselves together on the basis of equality for the promotion of an economic interest for themselves.

 

Merits

There are many benefits that the cooperative society offers to its members. Here we take a look at the advantages of the cooperative form of organisation are as follows.

 

(i) Equality in Voting Status: Cooperative Society is governed by the principle of ‘one man one vote’ , irrespective of the amount of capital investment by a member, each member is permitted to equal voting rights.

 

(ii) Limited Liability: The liability of members of a cooperative society is limited to the extent of their capital investment. The personal possessions and belongings of the members are, therefore, safe from being used to repay business debts.

 

(iii) Stable Existence: The continuity of the cooperative society is not affected by Death, bankruptcy or insanity of the members. A society, therefore, functions unaffected by any change in the membership.

 

(iv) Economy in Operations: The members normally offer honorary services to the society. As the focal point is elimination of middlemen, it helps in reducing costs. The customers or producers themselves hold membership in the society, and hence the risk of bad debts is low.

 

(v) Support from Government: The cooperative society insists on the idea of democracy thereby finding support from the Government in the form of low taxes, subsidies, and low interest rates on loans obtained.

 

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

 

Limitations

The cooperative society suffers from the following limitations:

 

(i) Limited Resources: Sources for a cooperative society are capital investment of the members with limited means. The low rate of dividend provided on investment also acts as a deterrent in attracting members or more capital from the members.

 

(ii) Inefficiency in Management: Cooperative societies are powerless to attract and employ expert managers due to their inability to pay high pay packages. The members who tender honorary services on a voluntary basis are by and large, not professionally set to handle the functions of the management effectively.

 

(iii) Lack of Secrecy: In consequence of open discussions in the meetings of members as well as disclosure of obligations as per The Societies Act (7), it is intricate to maintain secrecy about the operations of a cooperative society.

 

(iv) Government Control: In return of the privileges offered by the government, cooperative societies have to abide by several rules and regulations related to auditing and submission of accounts. There will be interference and control exercised by the state cooperative departments in the functioning of the cooperative organisation which negatively affects its freedom of operation.

 

(v) Differences of Opinion: Quarrels arising internally due to contradictory viewpoints may pave way to poor decision making. There can domination of personal interests and personal welfare motive which takes a backseat in the benefit of other members

 

Types of Cooperative Societies

There are several types of cooperative societies based on the nature of their operations are described below:

 

(i) Consumer’s Cooperative Societies: The consumer cooperative societies are created to protect the interests of consumers. The members consist of consumers wanting to obtain good quality products at reasonable prices. The society aims at eradicating middlemen to achieve economy in operations. They purchase goods in bulk directly from the wholesalers and sell them to the members, thereby eliminating the middlemen. Profits, if any, are shared based on their capital investment to the society or purchases made by the individual members.

 

(ii) Producer’s Cooperative Societies: These societies are formed to protect the interest of small producers. The society is comprised of producers wanting to procure inputs for production of goods in order to meet the demands of consumers. The society’s objective is to fight against the big capitalists and increase the bargaining power of the small producers. It supplies raw materials, equipment and other inputs to the members and also buys the output for sale. Profits among the members are generally shared.

 

(iii) Marketing Cooperative Societies: These societies are formed to help small producers in selling their products. The members are comprised of producers who aspire to obtain reasonable prices for their output. The society aims to eliminate middlemen and perk up competitive position of its members by securing a favourable market for the products. It brings in output of individual members and performs marketing functions.

 

(iv) Farmer’s Cooperative Societies: These societies are formed to protect the interests of farmers by giving better inputs at a reasonable price. The members of this society are comprised of farmers who aspire to jointly take up farming activities. The main objective is to gain the benefits of large scale farming and enhance the productivity. These societies provide better quality seeds, fertilizers, machinery and other modern techniques to implement in the cultivation of crops. This not only helps the farms in improving the yield and returns, but also solves the problems related to transportation, warehousing, packaging, etc., to sell the output for the best possible price. Profits are shared according to each member’s investment to the pool of output.

 

(v) Credit Cooperative Societies: These societies are formed to provide easy credit on reasonable terms to the members. The society is comprised of persons who seek financial aid in the form of loans.

The aim of these societies is to defend the members from exploitation by lenders who levy high rates of interest on loans. These societies grant loans to members from the amounts collected as capital and from deposits received from members thereby enabling levy of low rates of interest.

 

(vi) Cooperative Housing Societies: Cooperative housing societies are formed to aid people with limited income in constructing houses at reasonable price. The society is comprised of members who are aspiring to procure residential accommodation at lower costs. The main objective is to solve the housing problems of the members by constructing houses and by giving an option of paying in installments. These societies also construct flats or provide plots to members on which the members are entitled to construct a house as per their wish.

Question-15

Write about Joint Stock companies, its features, merits and demerits in detail.

Solution:
Joint Stock Company

 

A company can be defined as an association of persons formed for carrying out business activities wherein it has a legal status independent of its members. This form of organisation is governed by The Companies Act, 1956. A company can also be described as an artificial person possessing a separate legal entity, perpetual succession and a common seal. The owners of the company are the shareholders while the Board of Directors form the chief managing body elected by the shareholders. Generally, the owners exercise an indirect control on the business. The capital of the company is divided into small portions called ‘shares’ which are transferable freely from one shareholder to another person (this is not applicable in a private company).

 

Features

The characterization of a joint stock company highlights the following features:

 

(i) Artificial Person: A company can be defined as a creation of law and is not dependant on 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 perform the normal human functions. It is, hence, called an artificial person.

 

(ii) Separate Legal Entity: From the day of its inception, a company procures an identity, different from its members. Its assets and liabilities are separate from that of its owners. The law fails to recognize the business and owners to be one and the same.

 

(iii) Formation: The creation of a company is a time consuming, expensive and a complicated process. It involves a ground work of several documentation and compliance with many legal requirements before it can start functioning. Registration of a company is mandatory as provided under the Indian Companies Act, 1956.

 

(iv) Perpetual Succession: A company being a conception of the law, can be brought to an end only by law. It will not exist when a specific procedure for its closure, called winding up, is accomplished.

 

(v) Control: The entire administration and managing the activities of the company are undertaken by the Board of Directors, which appoints the top management officials for running the business. The directors hold a position of immense importance as they are accountable to the shareholders for the functioning of the company. The shareholders, however, do not have the right to be involved in the day-to-day running of the business.

 

(vi) Liability: The liability of the members is limited to the extent of the capital investment made by them in a company. They can use only the assets of the company to settle their claims as it is the company and not the members that owes the debt. The members can be requested to contribute to the loss only to the extent of the unpaid amount of share held by them. Beyond this, he is not liable to pay anything towards the debts or losses of the company.

 

(vii) Common Seal: As the company is an artificial person acts through its Board of Directors. The Board of Directors enter into an agreement with the others by signifying the company’s approval through a common seal. The common seal serves as an engraved equivalent of an official signature. Any agreement which does not have the company seal, is not legally binding on the company.

 

(viii) Risk Bearing: Unlike the sole proprietorship or partnership businesses, the risk of losses in a company is borne by the share holders.

 

Merits

The company form of organization has lot of advantages, some of which are discussed below:

(ii) Transfer of Interest: Transfer of ownership is very simple that adds to the advantage of investing in a company. The shares of a public limited company can be disposed and converted into cash when the need arises.

 

(ii) Limited Liability: The shareholder’s money will be repaid to them to the amount that is due by selling the assets of the company. The risk borne by the investors is low because, he does not have to part with his personal assets in a partnership firm.

 

(iii) Perpetual Existence: Survival of a company is not affected by death, retirement, resignation, insolvency or insanity of its members due to its separate entity from its members. A company will not die even if all the members quit the organization. It can be liquidated only as per the provisions of the Companies Act.

 

(iv) Scope for Expansion: When compared to the sole proprietorship and partnership forms of organisation, a company has large financial resources. Further, capital investment can be attracted from the public and through loans from banks and financial institutions. Thus there is greater scope for expansion. The investors are prone to invest in shares due to the limited liability, transferable ownership and prospects of high returns in a company.

 

(v) Professional Management: A company will afford to pay higher salaries to specialists and professionals. Hence it can employ people who are experts in their area of specialisation. There will be division of work and each department would be entitled to carry out one particular activity headed by a specialist thereby enabling efficient administration and wise decision making in the company’s operations

Limitations

The most important limitations of a company form of organisation are as follows:

 

(i) Complexity in Formation: To form an effective company, it is essential to allot time, effort and knowledge of legal procedures

 

(ii) Lack of Secrecy: The Companies Act requires every public company to provide lot of information to the Office of the Registrar of Companies. This information is made available to the general public as well. It is, therefore, hard to maintain confidentiality about the operations of company.

 

(iii) Impersonal Work Environment: Disjoining of ownership and management would lead to situations wherein there is absence of effort as well as personal involvement on the part of the officers of a company. With the large size of the company it is further difficult for the owners and top management to maintain personal contact with the employees, customers and creditors.

(iv) Numerous Regulations: The performance of a company is subject to many legal provisions and compulsions. A company is loaded with numerous restrictions in respect of aspects such as audit, voting, filing of reports, documentation, and is required to obtain several certificates from different agencies, viz., registrar, SEBI, etc. This brings down the level of freedom of operations of a company and consumes lot of time, effort and money.

 

(v) Delay in Decision Making: Companies are managed by the Board of Directors which is subsequently followed by the top management, middle management and lower level management. Communications and approvals for various proposals may cause delays not only in taking decisions but also in executing them.

 

(vi) Oligarchic Management: In a company bound by the Companies Act, the Board of Directors are representatives of the shareholders who are the direct owners of the organisation. However, in most of the organizations, there are more shareholders that leads to a situation where the owners have minimal influence in terms of controlling or running the business.

Question-16

What are the factors that help to decide the choice of business organization?

Solution:
Choice of Form of Business Organization

Till now, we had discussed about the different forms of organizations along with it advantages and disadvantages. There are certain considerations that are to be kept in mind while choosing the suitable form of organization. The important factors are shown in the table and explained below

Form of Organization

Factor

Maximum Advantages

Minimum Advantages

Capital available

company

Sole proprietorship

Cost of formation

Sole proprietorship

company

Ease of formation

Sole proprietorship

company

Transfer of ownership

Company (except Private company)

Partnership

Managerial skills

company

Sole proprietorship

Regulations

Sole proprietorship

company

Flexibility

Sole proprietorship

company

Continuity

company

Sole proprietorship

Liability

company

Sole proprietorship

1) Cost and Ease at Setting up the Organization: According to the cost of setting up, sole proprietorship is the most inexpensive of all. But, the legal requirements are minimum an the sale of operations are also small. In a partnership firm, the legal requirements and the cost is minimum due to the limited scale of operations. Registrations for co-operative stores and companies are mandatory an the formation of a company is lengthy and expensive as well. Looking at the initial cost factor, sole proprietorship is the most economical. There is more cost involved in the formation of a company.

 

2) Liability: The liability o owner/partner I unlimited in the case of sole proprietorship and partnership. The owners are liable to pay the debt from their personal assets. In a Joint Hindu undivided family, the Karta has unlimited liability. In the case of companies an o-operative societies, the creditor can limit their debt only to the extent of the assets of the company. From the investors point of view, company form of organization is best suited.

 

3) Continuity: Death, insolvency or insanity affects the sole proprietorship and partnership. This is not so in the case of a Joint Hindu Undivided family, co-operative societies and companies. For short term project, sole proprietorship or partnership is preferred.

 

4) Management Ability: A sole proprietor might not be well versed in all the activities. There is no such problem in forms like partnership or companies. But there is a drawback of conflict or difference in opinion. Complexity of organizational structure also requires professional handling an for this, company form is best. Proprietorship or partnership is recommended when the operations are simple and requires less skills to run the show. Thus, the nature of operations and professional management decides the form of organization to be chosen.

 

5) Capital Consideration: Companies collect huge amount of capital from investors in the form of shares. The combined resources of all partners is available in partnership, whereas the resource of sole proprietors is limited. Depending upon the scale of operations, company form can be opted and for small or medium sized business, one can choose sole proprietorship or partnership business. In terms of expansion, company form is preferred due to the capacity to raise funds and invest them in the infrastructure.

 

6) Degree of Control: For direct control over the operations, sole proprietorship may be chosen. When the partners do not mind sharing the decision making, partnership may be the one suitable. In the company form of organization, there is total separation of opening the management because there are specialized personnel to handle the company affairs.

 

7) Nature of Business: For direct contact with customers, sole proprietorship is preferred. In case of large scale operation and the contact with customers is not mandatory, then company form is preferred. Apart from this, factors like the capital employed, risk change with the nature of the business. So there are factors like sunning a mall scale operation will not be similar to running business with large scale operations. So all the relevant factor should be taken into account while deciding on the form of organization





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