Chapter 4: Forms of Business Organization – 1

Q.8 Answer the following.
1) Explain features of Sole Trading Concern.
Ans : 1) Individual Ownership : There is only one owner in sole trading concern. He invests all the capital required for the business. He owns all the assets of the business. He also remains responsible for all the liabilities of the business.
2) No Sharing of Profit and Risk : A proprietor is a single owner of the business. There is nobody to share his profits or losses. He enjoy the profit of the business as well as he bears all risks alone.
3) Self-employment : A sole trading concern is the best suitable form for self-employment. Any unemployed person can start business with small capital and earn for his livelihood. He gets a source of income by starting his own business.
4) Local Market Operations : Large amount of capital and expert managerial ability is required for large scale business. A sole trader has limited capital and limited managerial ability. Hence, generally a sole trader operates in local market.
5) No separate Legal Status : A sole trading concern does not enjoy separate legal status. In the eyes of Law, the sole trader and his business are considered one and the same.
6) Minimum Government Regulations : There is no separate act or law to govern the activities of sole trading concern. The registration of sole trading concern is not compulsory. Rigid legal formalities are not required for formation. Only the tax laws and labour laws have to be followed.
7) Unlimited Liability : Sole Trader has unlimited liability. Unlimited liability implies that, there is no distinction between personal property and business property of sole trader. If business assets are not sufficient to pay off liabilities of business then personal properties of sole trader may be attached to business properties.

2) Explain different types of Partnership.
Ans : A) General Partnership : In General Partnership, every partner has equal rights. General partnership comes into existence according to provisions of ‘Indian Partnership Act, 1932’.
1) Partnership at will : When there is no provision in partnership agreement regarding time period for partnership then it is known as ‘Partnership at will’. Such partnership can be easily dissolved. Any partner can give notice of his intension to leave partnership at any time.
2) Partnership for Particular Period : When Partnership is formed for a specific time such partnership is known as ‘Partnership for Particular Period’. For e.g., 6 months, 1 year. Such Partnership firm dissolves after expiry of particular period.
3) Partnership for Particular Venture : When partnership firm is formed for particular venture or business, such partnership is known as ‘Partnership for Particular Venture’. For example, construction of dams, roads or bridges, selling of seasonal products etc.
B) Limited Liability Partnership : Limited liability partnership comes into existence as per the provisions of ‘Limited Liability Partnership Act, 2008’. There are two kinds of partner as follows:
• Designated Partner : Every Limited liability partnership should have at least two Designated Partners. Among two partners one partner must be the resident of India.
• General Partner : In limited liability partnership all other partners are General Partners. The Limited Liability Partnership offers some personal liability protection to the participants. Individual partners in limited liability partnership are not personally responsible for the wrongful acts of other partners, or for the debts or obligations of the business.

3) Explain different types of Partners.
Ans :
1) Active Partner : An active partner is one who takes active participation in the day-to-day working of the business. Active partner may act in different capacities such as manager, organizer, adviser and controller of all the affairs of the firm. Active partner contributes to capital, shares profits or losses and has unlimited, joint and several liability. He is also known as working partner, ordinary partner etc. This partner may get some extra benefits for his services rendered other than share in the profit.
2) Dormant Partner : A dormant partner is one who contributes capital, shares profits and contributes to the losses of the business but does not take part in the working of the concern. A person may have money to invest but they may not be able to devote time for the business such a person becomes a dormant partner. Dormant partner also known as a sleeping partner and these partners are liable for the liabilities of the business like other partners. He cannot bind the business, i.e. firm, to third party, by his acts.
3) Nominal Partner : A nominal partner is one who only lends his name to the firm. He neither contributes to capital nor shares profits of the business. Due to his presence in firm, the business may get more credit in the market or may promote its sales. A nominal partner is liable to those third parties who give credit to the firm on the assumption of that person being a partner in the firm.
4) Secret Partner : The partner who is not known to third parties is termed as Secret partner. His membership in the firm is kept secret from outsiders. Secret partner contributes to capital, shares profits of the firm, assumes unlimited liability and he is liable for the losses of the business. He can take part in the working of the business.
5) Partner in profits only : When a partner agrees to share only profits of the firm and would not be liable for its losses, he is know as partner in profits only. Such partners share capital of the firm and may not take active participation in the management of the firm. However, such partners are liable for all debts of the firm.
6) Sub – Partner : When a partner agrees to share their own profit derived from the firm with a third person is known as sub – partner. A Sub-partner cannot represent himself as a partner in the original firm.
7) Partner with Limited Liability : This type of partner exists in a limited partnership. The liability of the partner is limited to the extent of capital contributed by him in the firm. He is a special partner and generally does not take active part in the working of the firm.
8) Quasi Partner : Quasi Partner is partner in partnership firm who retired from firm but left his capital with the firm. Quasi partner does not take active participation in the firm but shares profit of the firm. Such partner is liable for the debts of the firm. Many times such partners receives certain rate of interest on his capital.

4) Explain the five features of Joint Stock Company.
Ans : 
1) Voluntary Association : Person of any caste, religion can become the member of Joint stock company. There is no restriction regarding number of shares purchased by one person. After the death, shares of any shareholder, are transferred to his nominees. There is no restriction on transfer of shares.
2) Registration : Registration is compulsory according to the Companies Act, 2013. An application in prescribed format must be submitted to the Registrar of Company. Necessary registration fees are paid by the promoters. ‘A Certificate of Registration.’ (Incorporation Certificate) is issued to the company after registration. A private limited company can immediately start its business after getting Incorporation Certificate. A public limited company must obtain ‘Certificate of Commencement of Business’(Trading Certificate) to start its business.
3) Registered Office : The address of registered office of company is mentioned in Memorandum of Association. All the important document of a company are kept in the registered office. e.g. Register of shareholders, Annual Reports, Minutes Book, Memorandum and Articles of Association, Prospectus, Statutory Report etc.
4) Artificial Legal Person : A company is an artificial person created by law. It can enter into contract with third parties after registration. e.g. It can buy or sell asset, borrow money, open an account in bank etc. Therefore, only law can create joint stock company and only law can wind up it.
5) Separate Legal Status : There is a separate legal existence of joint stock company. It is a separate legal entity apart from its members.

5) Explain the merits of Co-operative Society.
Ans : 1) Democratic Management : Each member of co-operative society enjoys equal voting right. The principle of voting is ‘One member – one vote’. The number of shareholders are large. They are scattered over the region. Thus shareholders elect their representatives. They are called as ‘Managing Committee’ members. They look after the day-to-day management of the society.
2) Open Membership : The membership of co-operative society is voluntary and open to all. i.e. any person of any caste, creed, religion etc. can purchase shares of co-operative society and become the member of it. There is no compulsion to join or to leave the organization.
3) Less Operating Expenses : The cost of operation is low in co-operative society. No middlemen are involved. There are no advertisement expenses. Managing committee members provide honorary services. Various concessions, reliefs and privileges related to registration fees, stamp duty, income tax etc. are given by Government.
4) Limited Liability : The liability of the shareholders of co-operative society is limited. It is limited up to the extent of unpaid amount on shares held by them. Thus, member’s private property cannot be used even if the assets of the society are insufficient to pay the debts of the third party.
5) Tax Concession : Co-operative society plays an important role in the economic and social development of the country. The government gives many concessions to them, like exemption of payment of income-tax up to a certain limit. This helps to increase the profit of the society.
6) Self – Financing and Charity : As per the latest amendment act of co-operative society, a society can pay maximum 15% dividend to its members. Therefore, remaining surplus is used as self-financing. Some amount of profit is utilized for charity purpose, social activities and for the growth of co-operative society.

6) Explain the demerits of Partnership firm.
Ans : 1) Problem of Continuity : The partnership business may face problem of continuity unless provided for continuation of business in the event of death, insolvency or insanity to any partner in the partnership firm. If partnership agreement does not have provision of continuation of partnership business in case of death, insolvency and insanity, business is liable for dissolution.
2) Absence of Legal Status : In partnership business, there is no separate legal existence of partnership firm. In the eyes of law both are same. Law does not make any distinction between partners and firm. So there is absence of separate legal status for partnership firm. In the event of death, insolvency or insanity partnership firm is liable for dissolution.
3) Disputes : Disputes are common in partnership business as more than one individuals are involved in various activities. Some partners may or may not agree on some points which leads to disputes among partners. Sometimes disputes may lead to the dissolution of the firm.
4) Non – Transferability of Interest : No partner of business can transfer his share in business to the outsider without the consent of all partners in the firm. In general, there is non-transferability of interest in partnership business.
5) Limitations on number of Partners : The Indian Partnership Act limits maximum number of partners. No partnership firm can go beyond maximum prescribed limits of 50 partners.
This restricts maximum number of partners admitted in business. Such restrictions may affect partnership firm while capital contribution and even in case of management of partnership business.
6) Difficulty in Admission of Partner : In partnership business, there is often difficulty in admission of new partner. Admission of new partner may affect profit sharing ratio of existing partners. Therefore existing partner may object admission of new partners in business. Existing partners may not have full faith on incoming partner. This leads to difficulty in admission of new partner.
7) Unlimited Liability : Unlimited liability arises when the assets of the firm are not sufficient to pay off claims of the creditors. The private property of the partners is attached to satisfy such claims.
8) Risk of Implied Authority : There is often risk of implied authority in partnership business. Partners may take undue advantage of managing business on behalf of others which leads
to risk of implied authority. For Example, partners may sign some agreements in his own capacity which may be against the interest of the firm or partners may take loans or advances without consent of other partners.
9) Limited Capital : In partnership business, there is less capital as compared to joint stock company. There are restrictions on number of members which leads to limited capital raising capacity of business. Limited capital restricts the expansion of business.
10) Problem of Secrecy : Though books of accounts and financial matters relating to business are not required to be published, partnership firm lacks business secrecy. Some partners may share confidential information of business to competitors or third parties for getting financial benefits from them.

7) Explain the merits of Joint Stock Company.
Ans :  1) Large amount of Capital : A joint stock company issues shares to the public. The face value of shares is comparatively low. So it can collect huge amount of capital. It can also accept deposits from the public and issue debentures to raise funds.
2) Professional Management : Management of the company is in the hands of directors. They are elected representatives of shareholders. Due to large financial resources, a company can appoint highly qualified professionals, by paying attractive salary. So the knowledge of experts is used for day to day management of the company.
3) More Scope for expansion : A joint stock company collects large amount of capital. Attractive salaries are paid to professional managers. Proper authorities are given to take business decisions. Shareholders are interested in getting highest rate of dividend. As a result, company can undertake big and risky projects.
4) Public Confidence : A joint stock company enjoys public confidence. There is less interference of Government. Every Joint Stock Company in India is governed as per the provisions of ‘The Companies Act 2013’. As per the Act the company has to get its annual accounts audited by a practing Chartered Accountant.
5) Relief in Taxation : A joint stock company plays important role in the economic development of the country. It requires to pay taxes by flat rate. Certain exemptions and concessions are given to the joint stock companies, which opens branches in economically backward regions for e.g. tax holidays up to 5 years.
6) Expert Services : A joint stock company can appoint experts for managing business activities like Legal Advisers, Management Experts, Auditors, Consultants etc.
7) Perpetual Succession : A joint stock company enjoys continuous and stable life. The death, retirement, insolvency or insanity of its members does not result into dissolution of the Company.
8) Limited Liability : The liability of a member of a company is limited to the extent of the unpaid amount of shares held by him Shareholders are not liable for the debts of the company & there is no need to use their personal property for the purpose.

8) Explain the features of partnership firm.
Ans : 1) Agreement : Partnership is an outcome of an agreement between two or more persons who are conducting partnership business for earning profit. The agreement between partners may be oral or written. It is always advisable to have written agreement between all partners.
2) Joint Ownership : The partnership firm is jointly owned by the partners. The partners have to use the partnership property only for business purpose and not for personal use.
3) Joint Management : Every partner has right to take active participation in the management of the business. However, one or more partners may agree to manage business on behalf of other partners in the firm.
4) Lawful Business : Every partnership firm must undertake lawful business only. The partnership should not engage in any business which is forbidden by law of land. The partnership firm cannot be formed to carry out any unlawful business. e.g. partnership formed to smuggle goods, sale of illegal arms etc.
5) Liability : The liability of each partner is unlimited, joint and several. Unlimited liability arises when the assets of the firm are not sufficient to pay off claims of the
creditors. The private properties of the partners are attached to satisfy such claims. Joint liability indicates that each and every partner is jointly liable with other partners for the debt of the firm, whether incurred by himself or by other partners as agents of the firm Several liability indicates that each and every partner is individually and separately liable for the debts of the firm, whether incurred by himself or by other partners as agents of the firm.
6) Number of Partners : A Partnership firm must have minimum two persons at any time during the entire life of the partnership firm. Maximum partners permitted are 50.
7) Principal – Agent Relationship : Every partner is the joint owner of the business and partners take part in the management of the firm. Thus, every partner assumes two roles in business –
A) to each other within firm they are acting as ‘Principal’ B) while dealing with outsider or while representing firm they act as an ‘Agent’ of the firm.
8) Restriction on Transfer of Interest : No partner of firm can transfer or sell their interest or share in the firm to outsider without the prior consent of all other partners in the firm.
9) Registration : Registration of partnership is not mandatory as per the provisions of Indian Partnership Act, 1932. However, in Maharashtra (from April, 1985) and in some other state
registration of partnership is compulsory as per their respective state provisions. If Partners so desire, they can register their firm with the ‘Registrar of Firms’ of their respective States. The firm as well as partners enjoys several benefits after registration of the firm.
10) Sharing of profits and losses : The partners agree to share profits and losses among themselves in certain proportions. Such profit-loss sharing depends upon amount of capital introduced, services offered, goodwill of the partner and other terms of agreement. If agreement is silent on profit-loss sharing then all partners are assumed as equal partners.
11) Termination of Partner : A partner may resign on his own by giving notice to other partners in writing. The partners may also be removed from the firm for fraudulent activities.
12) Dissolution : The firm can be dissolved at any time, if the partners agree to do so. The partnership firm gets automatically dissolved in case of death, insolvency or insanity of any one of the partners unless provided in the partnership agreement about continued existence of the firm in such situations. The partnership firm automatically gets dissolved when total number of partners in the firm is reduced to one partner.

9) Explain the types of co-operative societies.
Ans : 1) Consumers Co-operative societies : Consumer’s Cooperatives are formed by the consumers to obtain their daily requirements at reasonable prices. These societies protect lower and middle class people from the exploitation. The profits of the society are distributed among members in the ratio of purchases made by them during the year. e.g. Super Bazaar, Apana Bazaar
2) Producer’s Co-operatives : Producer’s Cooperatives are voluntary associations of small producers and artisans who join hands to face competition and increase production. These
societies are of two types
a) Industrial Service Co-operatives : In this type, the society undertakes to supply raw materials, tools and machinery to the members. The producers work independently
and sell their industrial output to the co-operative society. The output of members is marketed by the society.
b) Manufacturing Co-operatives : In this type, producer members are treated as employees of the society and are paid wages for their work. The society provides
raw material and equipment to every member. The members produce goods at a common place or in their houses. The society sells the output in the market and its profits is distributed among the members.
3) Marketing Co-operatives : These are voluntary associations of independent producers who want to sell their output at remunerative prices. The output of different members is
pooled and sold through a centralized agency to eliminate middlemen. The sale proceeds are distributed among the members in the ratio of their outputs.
4) Co-operative Farming Societies : These are voluntary associations of small farmers who join together to obtain the economies of large scale farming. In India farmers are
economically weak and their land- holdings are small. In their individual capacity, they are unable to use modern tools, seeds, fertilizers, etc. They pool their lands and do farming collectively with the help of modern technology to maximize agricultural output.
5) Housing Co-operatives : These societies are formed by low and middle income group people in urban areas to have a house of their own. Housing cooperatives are of different types. Some societies acquire land and give the plots to the members for constructing their own houses. Other societies themselves construct houses and allot them to the members who make payment in installments. They also arrange loans from Financial Institutions and Government Agencies.
6) Credit Co-operatives : These societies are formed by poor people to provide financial help and to develop the habit of savings among members. They help to protect members
from exploitation of money lenders who charge exorbitant interest from borrowers. Credit cooperatives are found in both urban and rural areas.

10) Explain the demerits of Joint Stock Company.
Ans : i) Rigid Formation : Registration of joint stock company is compulsory. It requires number of legal documents. It is necessary to pay heavy registration charges. A public company cannot start its actual business without getting Commencement Certificate. Hence, procedure of formation is complicated, expensive and time consuming.
ii) Lack of Secrecy : In order to protect the interest of investor, it is compulsory to publish books of accounts every year. All the important documents of joint stock company are available for inspection at registered office. The competitors can take undue advantage of internal information of a joint stock company. Hence, there is no secrecy in joint stock company.
iii) Delay in Decision Making process : As an owner of the company, every shareholder has right to participate in management of the company. Therefore, all important business decisions are taken in the share holders meetings. The procedure of conducting the meeting is very lengthy and time consuming. It is necessary to prepare notice of meeting, copy of agenda, proxy forms etc. All these documents must be sent minimum 21 days before the meeting. Therefore there is always delay in decision making.
iv) No Personal Contact : There are large number of employees in joint stock company. Employees feel that their efforts should be appreciated by their superiors. But it is not possible in a large organization like joint stock company. The employees are demotivated to work hard. Similarly, Manager and Directors of the company are not able to establish personal contact with their customers. Customers likes & dislikes are not taken into consideration many times.
v) High Cost of Management : A joint stock company is a commercial organization. It is ready to spend huge amount for the advertisement. The manager gets best salary and other benefits. It requires huge amount for operational expenses. So the cost of management is very high in joint stock company.
vi) Reckless Speculation : Company is managed by directors. Few unscrupulous directors use confidential information for reckless speculations and their personal gains. This results in sudden fluctuation in the prices of shares in Stock Exchange. It adversely affects public confidence.