MCQ
The structure in which there is a separation of ownership and management is called
A. Sole proprietorship
B. Partnership
C. Company
D. All business organization
Company is a legal entity formed by a group of individuals to operate a business.
Compare the status of a minor in a Joint Hindu family business with that in a partnership firm
In a Joint Hindu family business, a minor male child enjoys equal ownership after his birth. He enjoys ownership over the property only to his share that he holds in the joint family
What do you understand by a sole proprietorship firm? Explain its merits and limitation?
Sole Proprietorship refers to a form of business organization that is owned managed and controlled by an individual's who is the recipient of all profits and bearer of all risk.
Merits: i. A sole proprietorship can quickly decide as it enjoys a considerable degree of freedom. ii. There is hardly any legal formality for setting up a sole proprietorship firm. iii. There is a sense of accomplishment in working iv. A sole proprietorship is the recipient of all profits earned from business and this motivates others to carry out their business efficiently.
Limitation i. Resources of a sole proprietor are limited because of the lending institutions that hesitate to extend long term loan ii. There is a limited expectancy of business as a sole proprietor is responsible for everything including death and it may lead to the closure of the business. iii. The creditors might recover its dues from the personal assets of the sole proprietor if possible.
In which form of organization is a trade agreement made by one owner binding on the others? Give reasons to support your answer.
Partnership is a form of organization where a trade agreement made by one owner binding on the others. This is because of the Indian Partnership Act 1932 that stated, a business carried out by partners is acted equally by all. One member is the agent and thereby binds the other.
The Karta in Joint Hindu family business has
A. Limited liability
B. Unlimited liability
C. No liability for debts
D. Joint liability
The Karta means the head of the family has unlimited liability over the business.
What is meant by ‘partner by estoppel’? Explain.
Partner by estoppel is meant a person who with their initiative gives an impression of being a partner of a firm. Such partners are considered as a partner even though they do not contribute to capital or a part in the management
Why is it important to choose an appropriate form of organization? Discuss the factors that determine the choice of the form of organization.
It important to choose an appropriate form of organization to start a business so that it can be managed properly.
The factors that determine the choice of the form of organization are as follows:
i. Initial business setting-up costs should be taken in concerned such as sole proprietorship is the most inexpensive way of starting a business. In case of a partnership, the advantage of less legal formalities and lower cost is there because of the limited scale of operations. Cooperative societies and companies have to be compulsorily registered. Formation of a company involves a lengthy and expensive legal procedure. For the initial cost, therefore, a sole proprietorship is the preferred form as it involves the least expenditure. Company form of organization, on the other hand, is more complex and involves greater costs.
ii. In case of sole proprietorship and partnership firms, the liability of the owners/partners is unlimited. In a joint Hindu family business, only the Karta has unlimited liability. In cooperative societies and companies, however, liability is limited and creditors can force payment of their claims only to the extent of the company's assets. Hence, for investors, the company form of organization is more suitable as the risk involved is limited.
iii. The continuity of sole proprietorship and partnership firms is affected by such events as death, insolvency or insanity of the owners. However, such factors do not affect the continuity of business in the case of organizations like joint Hindu family business, cooperative societies and companies. In case the business needs a permanent structure, company form is more suitable. For short term ventures, proprietorship or partnership may be preferred.
iv. A sole proprietor may find it difficult to have expertise in all functional areas of management. In other forms of organizations like partnership and company, there is no such problem. Division of work among the members in such organizations allows the managers to specialize in specific areas, leading to better decision making. But this may lead to situations of conflicts because of differences of opinion amongst people.
v. Companies are in a better position to collect large amounts of capital by issuing shares to a large number of investors. Partnership firms also have the advantage of the combined resources of all partners. But the resources of a sole proprietor are limited. Thus, if the scale of operations is large, company form may be suitable whereas for medium and smallsized business one can opt for partnership or sole proprietorship. Further, for expansion, a company is more suitable because of its capability to raise more funds and invest in expansion plans.
vi. 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 organization can be adopted. The added advantage in the case of company form of organization is that there is a complete separation of ownership and management and it is professionals who are appointed to independently manage the affairs of a company.
vii. If direct personal contact is needed with the customers such as in the case of a grocery store, proprietorship may be more suitable. For large manufacturing units, however, when direct personal contact with the customer is not required, the company form of organization may be adopted. Similarly, in cases where services of a professional nature are required, partnership form is much more suitable
The business assets of an organization amount to Rs. 50,000 but the debts that remain unpaid are Rs. 80,000. What course of action can the creditors take if?
(a) The organization is a sole proprietorship firm (b) The organization is a partnership firm with Anthony and Akbar as partners. Which of the two partners can the creditor’s approach for repayment of the debt? Explain giving reasons
(a) The sole proprietorship firm have unlimited liability. Partners are liable to repay debts even from their resources in case the business assets are not sufficient to meet its debts. Therefore, such actions can be taken by the creditors.
(b) In the given situation the creditor approach both of them as they are partners and liable to repay the debt jointly. If one of them is not available, then the other has to pay the debt and recover the amount later from the other partne
In a cooperative society, the principle followed is
A. One share one vote
B. One man one vote
C. No vote
D. Multiple votes
In a cooperative society the principle one man one vote means members can vote only once.
Briefly explain- Perpetual succession
A company is created by law but cannot end by itself. It can be ceased with a specific procedure
Explain the Types of Cooperative Societies.
Types of Cooperative Societies:
(i) Consumer’s cooperative societies:The consumer cooperative societies are formed to protect the interests of consumers. The members comprise of consumers desirous of obtaining good quality products at reasonable prices. The society aims at eliminating middlemen to achieve economy in operations
(ii) Producer's cooperative societies: These societies are set up to protect the interest of small producers. The society aims to fight against the big capitalists and enhance the bargaining power of the small producers. It supplies raw materials, equipment and other inputs to the members and also buys their output for sale. Profits among the members are generally distributed based on their contributions to the total pool of goods produced or sold by the society.
(iii) Marketing cooperative societies: Such societies are established to help small producers in selling their products. The members consist of producers who wish to obtain reasonable prices for their output. The society aims to eliminate middlemen and improve the competitive position of its members by securing a favorable market for the products.
(iv) Farmer's cooperative societies: These societies are established to 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 productivity. Such societies provide better quality seeds, fertilizers, machinery and other modern techniques for use in the cultivation of crops.
(v) Credit cooperative societies: Credit cooperative societies are 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. Such societies aim to protect the members from the exploitation of lenders who charge high rates of interest on loans. Such © PRAADIS EDUCATION DO NOT COPY societies provide loans to members out of the amounts collected as capital and deposits from the members and charge low rates of interest. (vi) Cooperative housing societies: Cooperative housing societies are 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.
Kiran is a sole proprietor. Over the past decade, her business has grown from operating a neighborhood corner shop selling accessories such as artificial jewellery, bags, hair clips and nail art to a retail chain with three branches in the city. Although she looks after the varied functions in all the branches, she is wondering whether she should form accompany to better manage the business. She also has plans to open branches countrywide.
(a) Explain two benefits of remaining a sole proprietor.
(b) Explain two benefits of converting to a joint-stock company.
(c) What role will her decision to go nationwide play in her choice of a form of the organization?
(d) What legal formalities will she have to undergo to operate business as a company?
(a) Kiran can enjoy all the profits earned from the business as she is the sole proprietor and would have to share with anyone. She can quickly decide as it enjoys a considerable degree of freedom.
(b) i. Capital can be attracted from the public as well as through loans from banks and financial institutions. Thus there is greater scope for expansion. ii. A company can afford to pay higher salaries to specialists and professionals. It can, therefore, employ people who are experts in their area of specializations
(c) Her decision to go nationwide would involve an increase in her scale of operation, requirement of capital and management abilities. She will have to bear more risk as she is the sole proprietor and her liability will increase to a large extent.
(d) To operate her business she has to go for certain legal formalities such as compulsory company registration, according to the Indian Companies Act 1956. The Legal formalities would once have to undergo to operate business as a company are – 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 Sole Proprietor
Duration of partnership
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 board of directors of a joint-stock company is elected by
A. General public
B. Government bodies
C. Shareholders
D. Employees
The shareholders are the owners of the company while the Board of Directors is the chief managing body elected by the shareholders
Briefly Explain Common seal.
it is an agreement of legal binding. The company have sealed in place of signatures
Distinguish between a Joint Hindu family business and partnership
self
The Head of the joint Hindu family business is called A. Proprietor
B. Director
C. Karta
D. Manager
Karta is the oldest member in the family who holds control over the business.
Briefly explain Karta
Karta is the eldest member of the family who has all the decision making powers. He has the responsibility of carrying out the business operation and can exercise full control over it
Despite limitations of size and resources, many people continue to prefer sole proprietorship over other forms of organization? Why?
There are many benefits of sole proprietorship over other forms of organization and for which prefer the most. Here are some of the benefits:
a. There are hardly any legal formalities to be fulfilled by a sole proprietorship firm to set up. It can be started and close according to the wish of the owner.
b. A sole proprietorship can alone take all the decision.
c. A sole proprietorship is the recipient of all profits earned from business and this motivates others to operate a business.
d. It is highly flexible in operation as it can adapt to any situation. This is possible because it involved only one person and he holds everything.