Class 11 Business Studies

Chapter 2 Forms of Business Organisation

Revision Notes

Forms of Business Organisation:

Sole Joint Hindu

Partnership
Proprietorship Family

Cooperative Joint Stock

society Company

Sole Proprietorship : Meaning, Features, Merits and Limitation:

➢ form of business organisation which is owned, managed and controlled

➢ by an individual who
➢ is the recipient of all profits and
➢ bearer of all risks
 Features Merits Limitation

• There is no seperate law • Quick decision making as • Lack of resources

to govern sole there is no need to (finance and borrowings)
proprietorship consult others is a major drawback in
• Owner is personally • Keep business operations the size and growth of
liable for payment of its confidential and the business
debts i.e. he has maintain secrecy • Death, insanity,
unlimited liability • Sole owner of the profit imprisonment, physical
• He is solely responsible earned i.e. maximum ailment, bankruptcy
for failure as well as incentive for hard work affects the business and
profit • Contributes to self can lead to its closure
• He has the right to run satisfaction andsense of • An unfavourable decision
the business and make accomplishment can create burden on the
all decision • No seperate law to owner as his liability is
• Business is not seperate govern sole unlimited
from owner i.e. business proprietorship i.e it is • Decision making is not
• Death, insanity, east to start and close balanced as owner
bankruptcy, physical the business at his wish cannot excel in all
ailment, imprisonment managerial tasks
of sole proprietor will
effect the continuity of
business

Joint Hindu Family

➢ form of organisation wherein the business is owned and carried

➢ by the members of the Hindu Undivided Family (HUF)
➢ basis of membership in the business is birth in a particular family and three successive
generations can be members
➢ business is controlled by the head of the family who is the eldest member and is called karta.
➢ members have equal ownership right over the property of an ancestor and they are known as
co-parceners.
 Features Merits Limitations

• Business does not • As karta has control • Faces problem of limited

require any agreement over the business, capital as business is run
as membership is by conflicts among on ancestral property
birth. member or interferance which limits expansion
• There should be at least in decision making is of business
two members in the avoided • Karta has unlimited
family and ancestral • Operation of business liability, his personal
property to be inherited are not terminated and property is used to
by them continuity of business is repay the debts
• The liability of all not at stake. • Dominance of karta may
members except the • Liability of co-parceners cause conflict amongst
karta is limited to their is limited to their share them and may
share of co-parcenery and their risk is well breakdown the family
property of the defined and precise unit.
business. The karta has • As business is run by
unlimited liability. family , loyalty and
• Karta controls the family cooperation is received
business and his from family members
decision are binding to
all
• Business continues even
after the death of karta,
next eldest becomes
karta
• Minors are also member
of the business

Partnership

➢ the relation between persons

➢ who have agreed to share the profit of the business
➢ carried on by all or any one of them acting for all
 Features Merits Limitation

• It is governed by The • Partnership can be formed • The liability of partners is

Indian Partnership Act, easily by an agreement both joint and several
1932. Has existence with between partner into a which may prove to be a
legal agreement governing place to carrout business drawback for those
relationship, sharing of and share risks partners who have greater
profit and losses • Partner can oversee personal wealth.
• Partners of firm have different function • partnership firms face
unlimited liability. partners according to their expertise problems in expansion
are jointly liable to repay • the capital is contributed beyond a certain size as
the debts and contribute in by no. of partner capital investment is not
their proportion of share • Reduces anxiety, burden sufficient to support large
• Reward comes in the form and stress on partner as scale operation
of profits which are shared risk is reduced by sharing • Lack of continuity ddue to
by the partners in an between partner death, retirement,
agreed ratio. However, • A partnership firm is not insolvencyor insanity of
they also share losses in legally required to publish partner can bring
the same ratio its accounts and submit its partnership to end
• Partner with mutual reports. Hence it is able to • difficult for any member of
consent share maintain confidentiality of the public to ascertain the
responsibility of decision information relating to its true financial status of a
making and day to day operations. partnership firm.
control of activities
• Lack of continuity ddue to
death, retirement,
insolvencyor insanity of
partner can bring
partnership to end
• With minimum 2 partner
partnership can be formed
.
• Business carried by all or
any one of the partner
acting for all

Types of Partner
 Type Meaning Capital Management Share in profit Liability
Contribution or Losses
Active Partner Partners who Contributes Participates in Shares Unlimited
take actual capital management profit/losses liability
part in
carrying out
business of
the firm on
behalf of other
partners
Sleeping Partners who Contributes Does not Shares Unlimited
Partner do not take capital participate in profit/losses liability
part in day to management
day activities
of business
Secret Partner Partner whose Contributes Participate in Shares Unlimited
association capital management profit/losses liability
with the firm but secretly
is unknown to
the general
public
Nominal Partner who Does not Does not Generally does Unlimited
Partner allows the use contributes participate in not Shares liability
of his/her capital management profit/losses
name by a
firm
Partner by Partner who Does not Does not Does not Unlimited
estoppel with his/her contributes participate in Shares liability
own initiative, capital management profit/losses
conduct,
behavior gives
an impression
to others that
he/she is
partner of the
firm
Partner by Partner who Does not Does not Does not Unlimited
holding out knowingly contributes participate in Shares liability
allows himself capital management profit/losses
or herself to
be
represented as
a partner in
the firm

Types of Partnership
On the basis of duration On the basis of Liablity

Partnership at will General Partnership

•It can continue as long as the partners •The liability of partners is unlimited and
want and is terminated when any partner joint.
gives a notice of withdrawal from •The partners enjoy the right to
partnership to the firm participate in the management of the firm
and their acts are binding on each other
as well as on the firm

Particular Partnership Limited Partnership

•Partnership formed for the •the liability of at least one partner is
accomplishment of a particular project unlimited whereas the rest may have
say construction of a building or an limited liability
activity to be carried on for a specified •The limited partners do not enjoy the
time period right of management and their acts do
not bind the firm or the other partners.
•Registration of such partnership is
compulsory.

Partnership Deed

• The written agreement which specifies the terms and conditions that govern the partnership is
called the partnership deed.

The partnership deed generally includes the following aspect:

• Name of firm
• Nature of business and location of business
• Duration of business
• Investment made by each partner
• Distribution of profits and losses
• Duties and obligations of the partners
• Salaries and withdrawals of the partners
• Terms governing admission, retirement and expulsion of a partner
• Interest on capital and interest on drawings
• Procedure for dissolution of the firm
• Preparation of accounts and their auditing
• Method of solving disputes

Procedure for firm registration:

1. Submission of application in the prescribed form 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 the firm carries on business

• The date when each partner joined the firm

• Names and addresses of the partners

• Duration of partnership

This application should be signed by all the partners.

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

3. The Registrar after approval will make an entry in the register of firms and will subsequently issue

a certificate of registration.

The consequences of non-registration of a firm are as follows:

(a) A partner of an unregistered firm cannot file a suit against the firm or other partners,

(b) The firm cannot file a suit against third parties, and

(c) The firm cannot file a case against the partners.

Cooperative Society

➢ The cooperative society is a voluntary association of persons, who join together with the
motive of welfare of the members.
➢ They are driven by the need to protect their economic interests in the face of possible
exploitation at the hands of middlemen obsessed with the desire to earn greater profits
➢ The process of setting up a cooperative society is simple enough and at the most what is
required is the consent of at least ten adult persons to form a society
➢ The capital of a society is raised from its members through issue of shares.
➢ The society acquires a distinct legal identity after its registration
 Features Merits Limitations

• The membership of a • The principle of ‘one man • Resources of a

cooperative society is one vote’ governs the cooperative society
voluntary as person is cooperative [Link] consists of capital
free to join a cooperative member is entitled to contributions of the
society, and can also equal voting rights. members with limited
leave anytime as per his • The liability of members means. The low rate of
desire. of a cooperative society dividend offered on
• The society can enter is limited to the extent of investment also acts as a
into contracts and hold their capital contribution deterrent
property in its name, sue • Death,bankruptcy or • Cooperative societies are
and be sued by others. It insanity of the members unable to attract and
has seperate identity. do not affect continuity employ expert managers
• The liability of the of a cooperative society because of their inability
members of a • the focus is on to pay them high salaries
cooperative society is elimination of • Open discussions in the
limited to the extent of middlemen, this helps in meetings of members as
the amount contributed reducing costs. The well as disclosure
by them as capital customers or producers obligations it is difficult
• The power to take themselves are members to maintain secrecy
decisions lies in the of the society, and hence about the operations of a
hands of an elected the risk of bad debts is cooperative society.
managing committee. lower. • Interference in the
• The cooperative society • The cooperative society functioning of the
through its purpose lays exemplifies the idea of cooperative organisation
emphasis on the values democracy and hence through the control
of mutual help and finds support from the exercised by the state
welfare. Hence, the Government in the form cooperative departments
motive of service of low taxes, subsidies, negatively affects its
dominates its working and low interest rates on freedom of operation
loans • Internal quarrels arising
• The cooperative society as a result of contrary
can be started with a viewpoints may lead to
minimum of ten difficulties in decision
members. The making.
registration procedure is
simple involving a few
legal formalities
Types of Cooperative Societies

• Consumer’s Cooperative Societies

▪ formed to protect the interests of consumers
▪ society aims at eliminating middlemen to achieve economy in operations
▪ It purchases goods in bulk directly from the wholesalers and sells goods to the
members
▪ Profits are distributed on the basis of either their capital contributions to the
society or purchases made by individual members.

• Producer’s Cooperative Societies

▪ set up to protect the interest of small producer
▪ The members comprise of producers desirous of procuring inputs for production
of goods to meet the demands of consumers
▪ Profits are distributed on the basis of their contributions to the total pool of
goods produced or sold by the society.

• Marketing Cooperative Societies

▪ established to help small producers in selling their products.
▪ The members consist of producers who wish to obtain reasonable prices for
their output
▪ It pools the output of individual members and performs marketing functions like
▪ transportation, warehousing, packaging, etc., to sell the output at the best
possible price.
▪ Profits are distributed according to each member’s contribution

• Farmer’s Cooperative Societies

▪ protect the interests of farmers by providing better inputs at a reasonable cost
▪ The members comprise farmers who wish to jointly take up farming activities
▪ The aim is to gain the benefits of large scale farming and increase the
productivity.
▪ Improves the yield and returns to the farmers, but also solves the problems
associated with the farming on fragmented land holdings

• Credit Cooperative Societies

▪ established for providing easy credit on reasonable terms to the members.
▪ The members comprise of persons who seek financial help in the form of loans.
▪ The aim of such societies is to protect the members from the exploitation of
lenders who charge high rates of interest on loans.

• Cooperative Housing Societies

▪ established to help people with limited income to construct houses at
reasonable costs.
 ▪ The members of these societies consist of people who are desirous of procuring
residential accommodation at lower costs.
▪ The aim is to solve the housing problems of the members by constructing
houses and giving the option of paying in instalments

Joint Stock Company

➢ A company is an association of persons formed for carrying out business activities and has a
legal status independent of its members.
➢ A company can be described as an artificial person having a separate legal entity, perpetual
succession and a common seal
➢ The shareholders are the owners of the company while the Board of Directors is the chief
managing body elected by the shareholders
➢ The capital of the company is divided into smaller parts called ‘shares’ which can be transferred
freely from one shareholder to another person (except in a private company).
 Featuures Merits Limitation

•A company is an artificial •The shareholders are liable to •The formation of a company

person. It is creation of law the extent of the amount requires greater time, effort
and exists independent of its unpaid on the shares held by and extensive knowledge of
members them legal requirements and the
•A company acquires an •Share of a public limited procedures involved
seperate legal identity. The company can be sold in the •Separation of ownership and
law does not recognise the market and as such can be management leads to lack of
business and owners to be easily converted into cash in effort as well as personal
one and the same. case the need arises. This involvement on the part of the
•The formation of a company is avoids blockage of investment officers of a company
a time consuming, expensive and presents the company as •Information of company is
and complicated process. a favourable avenue for provided to Registrar of
Incorporation of companies is investment companies time to time and
compulsory •Existence of a company is not hence informaation is
•It will only cease to exist when affected by the death, available to general public
a specific procedure for its retirement, resignation, •The functioning of a company
closure, called winding up, is insolvency or insanity of its is subject to many legal
completed. Members may members as it has a separate provisions and compulsions.
come and members may go, entity from its members. This reduces the freedom of
but the company continues to •Capital can be attracted from operations of a company and
exist. the public as well as through takes away a lot of time,
•The management and control loans from banks and financial effort and money
of the affairs of the company institutions. Thus there is •Communication as well as
is undertaken by the Board of greater scope for expansion approval of various proposals
Directors, which appoints the •Company can afford to pay to Top, middle and lower level
top management for running higher salaries to specialists management may cause
of business and professionals. It can, delays not only in taking
•The liability of the members is therefore, employ people who decisions but also in acting
limited to the extent of the are experts in their area of upon them.
capital contributed by them in specialisations •Board of Directors are
a company. The members can representatives of the
be asked to contribute to the shareholders who are the
loss only to the extent of the owners. The owners have
unpaid amount of share held minimal influence in terms of
by them controlling or running the
•A company may business
•or may not have a common •Various demands pose
seal. problems in managing the
•The risk of losses in a company as it often becomes
company is borne by all the difficult to satisfy such diverse
share holders. interest
Difference Between Public company and Private company

Basis for Comparison Public Company Private Company

Meaning A company which is owned and A company which is owned and
traded publicly traded privately
Minimum member 7 2
Maximum Member Unlimited 200
Minimum Director 3 2
Suffix Limited Private Limited
Start of Business After receiving certificate of After receiving certificate of
incorporation and certificate of incorporation
commencement of business
Statutory Meeting Compulsory Optional
Issue of Prospectus/ Statement Obligatory Not required
in lieu of Prospectus
Public Subscription Allowed Not allowed
Quorum at AGM 5 members must present in 2 members must present in
person person
Transfer of shares Free Restricted

Choice of Form of Business Organization

Factors influencing form of Most advantage Least advantage

organisation
Cost and ease in setting up of Sole Proprietorship Company
business
Liability Company Sole Proprietorship
Continuity Company Sole Proprietorship
Management ability Company Sole Proprietorship
Capital Consideration Company Sole Proprietorship
Degree of control Company (except private Partnership
company)
Nature of business: direct Sole Proprietorship Company
personal contact
Regulations Sole Proprietorship Company
Flexibility Sole Proprietorship Company