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Question-1

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

Solution:
a). Grocery store –Because this kind of business is more of a personalized kind of business.

b). Medical store - Because business is performed on a small scale.

c). Legal consultancy – it depends on the scale of operations. If the business is done on a large scale, then it is a joint effort and if the business is done on a small scale, then the firm is a sole proprietorship firm.

d). Craft centre - sole proprietorship because such shops are rare to find and not many people will be interested in running such a shop.

e). Internet café – This is purely run by a single person in one locality.

Question-2

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

Solution:
a). Legal consultancy – it depends on the scale of operations. If the business is done on a large scale, then it is a joint effort and if the business is done on a small scale, then the firm is a sole proprietorship firm.

b). Chartered accountant firm – partnership firm because a chartered accountant firm is mostly run by three or four Chartered accountants together where they share the liability and risk.

Question-3

Explain the following terms in brief.

Solution:
a) 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

b) 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.

c) Karta

The kind of organization in which the business is owned and run by the members of the Hindu Undivided Family (HUF) is called the Joint Hindu Family Business and it is bound by the Hindu Law. The business is under the control of the head of the family who is the eldest member named karta.

d) 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.

Question-4

Compare the status of a minor in a Joint Hindu Family Business with that in a partnership firm.

Solution:
S. No. Minor in a HUF Minor in a partnership firm
1. By birth, a child born in a HUF becomes a member With the consent of the other partners, a minor can be included as a partner
2. They have a limited share in both the profit and loss of the HUF. Minors have a share only in the profit of the business.

 

Question-5

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

Solution:
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.

Question-6

State the important privileges available to a private company.

Solution:
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 need not get permission from the Government which the public company has o follow.

Question-7

How does a co-operative society exemplify democracy and secularism? Explain.

Solution:
Co-operative societies illustrates democracy in the following ways.

a) 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.

b) 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.

c) 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.

d) 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.

Secularism is demonstrated as follows

a) 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.

b) 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.

Question-8

What is meant by partner by estoppels? Explain.

Solution:
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.

Question-9

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

Solution:
Sole proprietorship refers to a kind of business organization wherein an individual owns, manages, controls and receives all the profits and the risks as well. This is obvious from the term itself. The word "sole" implies "only", and "proprietor" refers to "owner". Hence, a sole proprietor can be addressed as the only owner of a business.

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 since they are the only beneficiaries of the business. There is no necessity to share the profits arising out of the business with any other person. This advantage urges them to work harder and benefit out of the profit thus earned.

(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

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.

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-10

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

Solution:
The following points help us to realize that partnership business is relatively unpopular.

1) Formation
  If the partnership firm is registered properly, then they reap the benefits of registration.

2) Limited Contribution of capital
   Capital that is raised from the partners is limited to the number of partners registered.

3) Unlimited and joint liability
   The liability of the partners is unlimited and joint.

4) Continuity
   Continuing the partnership firm is not stable and is affected by death or insolvency of other partners.

5) Control and management
   With regard to the control and management, partners take decisions, consent of all partners is required.

6) Transfer of ownership
    It is difficult to transfer the ownership of a partnership firm and it is not preferred form of business organization.

Merits
The following are the merits of partnership and 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 little 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 and this 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 and several and is a problem for those partners who have immense wealth.

2. limited resources
There is a restriction 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
It 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-11

Why is it important to choose an appropriate form of organization? Discuss the factors that determine the choice of form of organization.

Solution:
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 and 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 small 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.

Question-12

Discuss the characteristics, merits and limitation of co-operative form of organization. Also describe briefly different types of co-operative societies.

Solution:
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 organization 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 organization 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 organization 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 possibilities for the 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 who prefer 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 who wish 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-13

Distinguish between a Joint Hindu Family business and partnership.

Solution:

S. No

Joint Hindu Family Business

Partnership Firm

1.

Carried on by members of a Hindu Undivided Family

Is an association or people from a secular background

2.

This is governed by the Hindu law

This is governed by the partnership Act of 1932

3.

The business is controlled by Karta who is the head of the family

All the partners have control (depending upon the type of partner) of the business in a partnership firm

4.

Managerial ability is limited to the Karta The managerial skill is more due to the knowledge of all the partners involved

5.

Minor is included automatically by birth in the HUF Minor can be included if the consent from

6.

Liability is limited only to the Karta All the partners are equally liable.

7.

Specialization is limited Areas of specialization is vast in a partnership firm

8.

There is only one type of Hindu Undivided Family There are different types of partners like active, sleeping, secret and nominal partners

9.

As the name suggests, the business is carried by members of a joint Hindu Undivided family A minimum of two persons and a maximum of ten members are required to form a partnership firm.

10.

Profit sharing and risk bearing remains with the karta only Partners share profit/loss and risk equally

 

Question-14

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

Solution:
1) Formation and closure

To begin a sole proprietorship is very easy. The formalities to start a sole proprietorship are limited except for certain businesses which require a license. Similarly, closing a sole proprietorship is also easy.

2) Control

The decisions regarding the running of the business and decision making lies only with the sole proprietor. There is no necessity to get permission from any other person.

3) Confidential information

Any information with regard to the business lies with the sole proprietor and the secrets of the business remains in one place without being leaked out.

4) Quick decision

Since there is only one person to run the business, any decision that is taken with regard to the business is done quickly and with an amount of freedom which no other form of organization can boast of.

5) Satisfaction

Since the decision making and completion of the task lies with one person, there is satisfaction of completing the desired task in the desired manner.





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