CHAPTER 2:- FORMS OF BUSINESS ORGANISATION

1. Sole proprietorship - refers to a form of organisation where business is owned, managed and controlled
by a single individual who bears all the risks and is the only recipient of all the profits.
2. Partnership - an association of two or more persons who agree to carry on a business together and
share the profits as well as bear risks collectively.
3. Joint Hindu family business - is a business owned and carried on by the members of a Hindu
Undivided Family, which is governed by the Hindu law. Karta the oldest male member of the
family controls the business.
4. cooperative society - It is a voluntary association of persons who get together to protect their economic
interests. The major advantages of a cooperative society are e
liability, stable existence, economy in operations, support from government, and ease of formation.
5. Company - it is an artificial person, existing only in the eyes of the law with perpetual succession and
having a separate legal identity.
Companies can be of two types private and public. A private company is one which
restricts transfer of shares and does not invite the public to subscribe to its securities. A public company,
on the other hand, is allowed to raise its funds by inviting the public to subscribe to its securities.
Furthermore, there is a free transferability of securities in the case of a public company.
6. Stages in the formation of a company promotion stage, incorporation of registration stage, capital
subscription stage, commencement of business stages.
7. Function of promoters identification of business opportunity, feasibility studies, approval of name ,
fixing up signatories to memorandum of association, appointment of professionals, preparation of
necessary documents.
8. Choice of form of organisation - Selection of an appropriate form of organisation can be made after
taking various factors into consideration. Initial costs, liability, continuity, capital considerations,
managerial ability, degree of control and nature of business are the key factors that need to taken into

QUESTIONS
Q. MCQ type Questions MARK
NO
1 The Karta in Joint Hindu Family business has 1
(a) Limited liability (b) Unlimited liability
(c) No liability for debts (d) Joint liability
2 Which one of the following is not required by a private company? 1
(a) Holding general meeting (b) Issue of prospectus
(c) Appointment of directors (d) Paying dividend
3 Application for approval of name of a company is to be made to 1
(a) SEBI (b) Registrar of Companies
(c) Government of India (d) Government of the state in which company is to be registered
4 In case of heavy loss, creditors can claim the recovery of their dues from the personal assets 1
of a sole proprietor. Which feature of sole proprietor in highlighted here?
5 1
underlying feature of a Joint Stock Company.
6 to pay its debt then can the balance be recovered from 1
private assets of its members?
7 Is registration of a cooperative society compulsory? 1

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8 (A) sole proprietor enjoys considerable degree of freedom in making business decisions. 1
(R) Quick decision making leads to timely capitalisation of market opportunities as and
when
they arise.
(a) Both A and R are true and R is the correct explanation of A.
(b) Both A and R are true and R is not the correct explanation of A.
(c) A is true but R is false.
(d) A is false but R is true.
9 (A) Registration of a partnership firm is a conclusive proof of its existence. 1
(R) It is optional for a partnership firm to get registered.
(a) Both A and R are true and R is the correct explanation of A.
(b) Both A and R are true and R is not the correct explanation of A.
(c) A is true but R is false.
(d) A is false but R is true.
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(R) Right to vote given to the members lends the cooperative society a democratic character.
(a) Both A and R are true and R is the correct explanation of A.
(b) Both A and R are true and R is not the correct explanation of A.
(c) A is true but R is false.
(d) A is false but R is true
Short Answer Type Questions (Case Study and Others)
11 Name the following : 3
(a) The person who promotes a business.
(b) The document containing the rules, regulations and bye-laws of a company.
(c) The document inviting subscriptions for shares and debentures.
12 - 3
13 A book shop owner wants to expand his business and he wants to open another branch. He 3
can appoint a manager to run the branch or take a partner. What are the basis which will help
him decide to choose between a manager or a partner?
14 ost active member in a Joint Hindu Family Business. He is too powerful to 3

15 In a developing nation like India, cooperative societies are playing an important role. But 4
these are inherited with certain limitations. State any four such limitations.
16 State the important privileges available to a private company. 4
17 4

18 Discuss the legal position of promoters with respect 4

to a company promoted by them
Long Answer Type Questions (Case Study and Others)
19 Pablo Pvt Ltd, the famous group of promoters submitted an application to the registrar of the 6
company for the approval of the name for shoe manufacturing company. They chose 'Niky
Ltd' as the name of the company so as to increase the sales because Nike was a well known
and well established brand.
( a)Who selects the name of the company?
(b) Would the proposed name be accepted by the registrar? Give reason.
( c) State any two functions performed by the one identified in (a)
20 Sarthak and Suyash have decided to start a large scale manufacturing business in rural area 6
where enough job opportunities were not available. This kind of business requires huge
capital to be invested. Also, they identified the various activities which are to be performed
for running of the business and grouped them under various departments. In order to facilitate

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 the work, they appointed managers for these departments. After selection tests and
interviews, they selected persons out of many states like Karnataka, Delhi, Andhra Pradesh
and Bihar.
(a) Identify the form of business organisation which Sarthak and Suyash have found
appropriate for their business.
(b) Enumerate the factors which helped them to decide the form of business organisation.
(c) What values have been highlighted in the above para.
21 6
22 Why is it important to choose an appropriate form of organisation? Discuss the factors that 6
determine the choice of form of organisation.
23 What is the maximum number of partners which a partnership firm may have which is 1
involved in a manufacturing business?
(a) 50 (b) 20
(c) 10 (d) Unlimited
24 Preliminary contracts are 1
(a) Binding on the company (b) Binding on the company, if ratified after
incorporation
(c) Binding on the company, after incorporation (d) Not binding on the company
25 Oligarchic management is related to which form of business organisation? 1
(a) Cooperative society (b) Company
(c) Hindu undivided family business (d) Partnership

ANSWERS:
Q. ANSWER(MCQ type Questions)
NO
1 B
2 B
3 B
4 Unlimited Liability.
5 Perpetual succession.
6 No, because liability of members of a company is limited to the extent of its unpaid amount of shares
held by them.
7 Yes, registration of a cooperative society is compulsory under the Cooperative Societies Act, 1912
8 B
9 B
10 B
Answer of Short Answer Type Questions (Case Study and Others)
11 (a) Promoter (b) Articles of Association (c) Prospectus
12 Following are the merits of partnership over sole proprietorship :
(i) Greater Financial Resources. The partnership permits several persons to pool their financial
resources into a common business. Thus, capital accumulation is much higher than that of
proprietorship
(ii) Balanced Decision Making. An individual is not able to handle all the different activities of
a business. The partners in a partnership firm can handle different functions according to
their areas of expertise.
(iii) Division of Risk. Loss of the firm will be shared by all the partners. Thus, the burden of
risk and liabilities borne by each partner will be comparatively less.

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13 The choice between salaried manager/assistant and partner will depend upon the following basis :
* If the owner requires additional capital as well as managerial assistance, and is interested in sharing
of risk (i.e., sharing of profits or losses), then he should take a partner.
* But if he needs someone to share his managerial duties only and does not want to share his profits
then it is better to employ a salaried manager/assistant.
14 Karta too Powerful. In Joint Hindu Family Business, the Karta has complete control over the family
business. He may misuse his authority for personal gains. An incompetent Karta can ruin the business
since all the business decisions are taken by him only. At times the decisions taken by Karta might not
be acceptable to other members. This may cause conflicts amongst them and may even break the
family unity
15 (i) Limited Resources/Shortage of Funds. Cooperative societies usually suffer from shortage of funds
because of limited capital from its members.
(ii) Inefficiency in Management. Cooperative societies are managed by part-time and inexperienced
people since they do not have enough funds to employ expert managers because of their inability to
pay them high salaries.
(iii) Lack of Secrecy. It is difficult to maintain secrecy in a cooperative society because matters are to
be discussed in meetings to be and its accounts are published.
(iv) Government Control. There are certain rules laid down by government to be followed by
cooperative societies e.g., auditing of accounts, submission of accounts, etc
16 Following are the privileges available to a private company :
(i) Number of Members. A private company can be formed by two persons while a public company
by seven persons.
(ii) Exemption from Prospectus. A private company is not required to issue a prospectus as public is
not invited to subscribe to the shares of a private company.
(iii) No Minimum Subscription. A private company can allot the shares without receiving minimum
subscription whereas a public company must receive minimum
subscription.
(iv) Commencement of Business. A private company can commence its business immediately after
incorporation. It does not require certificate for commencement of business which is required in case
of public company
17 - A company is legally born on the date printed on the certificate of

a legal entity with perpetual succession on such date. It becomes entitled to enter into valid contracts.
The Certificate of Incorporation is a conclusive evidence of the regularity of the incorporation of a
company.
- It is a conclusive evidence that the company is entitled
to do business. With the grant of this certificate the formation of a public company is complete and the
company can legally start doing business
18 Promotion means conceiving a business opportunity and taking an initiative to form a company.
Promoters undertake various activities to get a company registered and get it to the position of
commencement of business. But they are neither the agents nor the trustees of the company. They
as the company is yet to be incorporated. Also promoters are not the trustees of the
company. Promoters of a company enjoy a fiduciary position with the company, which they must not
misuse. They can make a profit only if it is disclosed but must not make any secret profits. Promoters
are not legally entitled to claim the expenses incurred in the promotion of the company. However, the
company may choose to reimburse them for the pre incorporation expenses
Answer of Long Answer Type Questions (Case Study and Others)
19 (a) Promoter
( b) No, the selected name of the company is not accepted. Reason: the name should not be identical or
too close resembling the name of any existing company.

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 (c) Identification of business opportunities, feasibility study ,name approval, fixing of signatories to
Memorandum of association , Appointment of professionals, Preparation of necessary documents.
20 (a) Joint Stock Company.
(b) Factors. (i) Large size (ii) Huge capital (iii) Nature of business (iv) Management ability.
(c) Creation of job opportunities for rural people. Providing growth opportunities to people of
different states
21 Memorandum of Association. Memorandum of Association is the most important document as it
defines the objectives of the company. No company can legally undertake activities that are not
contained in its Memorandum of Association.
The Memorandum of Association contains different clauses, which are given as follows:
(a) Name Clause - This clause contains the name of the company. The proposed name should not be
identical or similar to the name of another existing company.
(b) Situation Clause (Registered Office Clause) - This clause contains the name of the state, in which
the registered office of the company is to be situated.
(c) Objects Clause - This clause defines the objectives/purposes with which the company is formed.
(d) Liability Clause - The clause limits the liability of the members to the amount unpaid on the shares
held by them.
(e) Capital Clause - This clause specifies the maximum capital which the company will be authorised
to raise through the issue of shares.
(f) Association Clause - In this clause, the signatories (minimum 7 in case of a public company and
minimum 2 in case of a private company) to the Memorandum of Association state their intention to
be associated with the company and also give their consent to purchase qualification shares
22 It is important to choose an appropriate form of organisation because each form has certain advantages
as well as disadvantages. Following are the important factors:
(i) Cost and ease in setting up the organisation - Sole proprietorship is the preferred form as it
involves least expenditure. Company form of organisation, on the other hand, is more complex and
involves greater costs. (ii) Liability - From the point of view of investors, the company form of
organisation is more suitable as the risk involves is limited.
(iii) Continuity - In case of business needs a permanent structure, company form is more suitable. For
short term ventures, proprietorship or partnership may be preferred.
(iv) Management ability - The nature of operations and the need for professionalised management
affect the choice of the form of organisation.
(v) Capital considerations - If the scale of operations is large, company form may be suitable whereas
for medium and small sized business one can opt for partnership or sole proprietorship. Further, from
the point of view of expansion, a company is more suitable because of its capability to raise more
funds and invest in expansion plans.
(vi) Degree of Control - If direct control over operations and absolute decision making power is
required, proprietorship may be preferred. But if the owners do not mind sharing control and decision
making, partnership or company form of organisation can be adopted
23 b
24 b
25 b

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