1st PUC Business Studies Question Bank Chapter 2 Forms of Business Organisation

Karnataka 1st PUC Business Studies Question Bank Chapter 2 Forms of Business Organisation

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1st PUC Business Studies Forms of Business Organisation Textual Questions and Answers

1st PUC Business Studies Forms of Business Organisation Multiple Choice Questions

Question 1.
The structure in which there is separation of ownership and management is called
(a) Sole proprietorship
(b) Partnership
(c) Company
(d) All business organisations
Answer:
(c) Company

Question 2.
The Karta in Joint Hindu Family business has
(a) Limited liability
(b) unlimited liability
(c) No liability for debts
(d) Joint liability
Answer:
(b) unlimited liability

Question 3.
In a cooperative society the principle followed.is
(a) One share one vote
(b) One man one vote
(c) No vote
(d) Multiple votes
Answer:
(b) One man one vote

Question 4.
The board of directors of a Joint Stock Company is elected by
(a) General public
(b) Government bodies
(c) Shareholders
(d) Employed
Answer:
(c) Shareholders

Question 5.
The maximum number of partners allowed in the banking business are
(a) Twenty
(b) Ten
(c) No limit
(d) Two
Answer:
(b) Ten

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Question 6.
Profits do not have to be shared. The statement refers to
(a) Partnership
(b) Joint Hindu family business
(c) Sole proprietorship
(d) Company
Answer:
(c) Sole proprietorship

Question 7.
The capital of a company is divided into number of parts each one of which are called
(a) Dividend
(b) Profit
(c) Interest
(d) Share
Answer:
(d) Share

Question 8.
The head of the Joint Hindu Family business is called
(a) Proprietor
(b) Director
(c) Karta
(d) Manager
Answer:
(c) Karta

Question 9.
Provision of residential accommodation to the members are reasonable rates is the objective of
(a) producers cooperative
(b) Consumers cooperative
(c) Housing cooperative
(d) Credit cooperative
Answer:
(c) Housing cooperative

Question 10.
A partner where association with the firm is’unknown to the general public is called
(a) Active partner
(b) Sleeping partner
(c) Nominal partner
(d) Secret partner
Answer:
(d) Secret partner

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1st PUC Business Studies Forms of Business Organisation Short Answer Questions

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?
(a) Grocery store
(b) Medical store
(c) Legal consultancy
(d) Craft center
(e) Internet cafe
(f) Chartered accountancy firm
Answer:
Sole proprietorship will be most suitable in case of a Grocery store as in this case, initial business setting-up costs are not very high, the legal requirements are minimum and the scale of operations is small. Besides, direct personal contact is needed with the customers in the case of a grocery store and hence, sole proprietorship where there is a single person who owns and manages the business may be more suitable as he would be able to know his customers well and thus serve them better.

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Question 2.
For which of the following types of business do you think a partnership form of organization would be more suitable and why?
(a) Grocery store
(b) Medical store
(c) Legal consultancy
(d) Craft centre
(e) Internet cafe
(f) Chartered accountancy firm
Answer:
Partnership form of organization would be most suitable for an Internet cafe as this business needs greater capital investment and varied skills. It can come into existence easily through a legal agreement by putting an agreement between the prospective partners into place whereby they agree to carry out the business of the firm and share risks. There is no compulsion with respect to registration of the firm. In case of lack of demand closure of the firm too is not difficult. Further the partners are jointly and individually liable for payment of debts which does not put the liability on one person as in sole proprietorship.

Question 3.
Explain the following terms in brief
(a) Perpetual succession
(b) Common seal
(c) Karta
(d) artificial person
Answer:
(a) Perpetual Succession
Company is a legal entity separate of its owners or members. It can be brought to an end only by law as it is created by the law. It will only cease to exist when a specific procedure for its closure, called winding up, is completed. Members may come and go, but the company continues to exist through consecutive succession of old members by new members on a continuous basis. We can say that ‘perpetual! succession’ implies permanent existence which is not affected by death, retirement insolvency of members.

(b) Common Seal
A company is a creation of law and exists independent of its members: Company is thus considered to be an artificial person who acts through its Board of Directors. When the Board of Directors enters into an agreement with others, it indicates the company’s approval through a common seal. The common seal is the engraved equivalent of an ‘ official signature. Any agreement which does not have the company seal put on it is not legally binding on the company.

(c) Karta
The head of the Joint Hindu Family who is the eldest member and controls the Joint Hindu family business which is a specific form of business organization found only in India is called Karta. Joint Hindu family business refers to a form of organization r wherein the business is owned and carried on by the members of the Hindu Undivided Family (HUF). It is governed by the Hindu Law. The control of the family business lies with the Karta. He takes all the decisions and is authorized to manage the business.

His decisions are binding on the other members. The Karta has unlimited liability while the liability of all other members is limited to their share of co-coparcenary property of the business.

(d) Artificial Person
A company is called an artificial person because just like natural persons, a company can own property, incur debts, borrow money, enter into contracts, sue and be sued but unlike them it cannot breathe, talk, walk, eat, etc. A company is a creation of law and exists as an artificial person independent of its members.

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Question 4.
Compare the status of a minor in a Joint Hindu Family Business with that in a . partnership firm.
Answer:
When the inclusion of an individual into the business occurs due to the birth in the Hindu Undivided Family (HUF) is known as Minor. On the other hand, partnership is based on legal contract between two persons who agree to share the profits or losses of a business carried on by them and a minor is incompetent to enter into such a valid contract with others. Hence, a minor cannot become a partner in any firm. However, a minor can be admitted to the benefits of a partnership firm with the mutual consent ‘ of all other partners.

Question 5.
If registration is optional, why do partnership firms willingly go through this legal formality and get themselves registered? Explain.
Answer:
Registration of partnership firm means recording of the firm’s name and its relevant prescribed particulars, in the Register of firms kept with the Registrar of firms. It provides conclusive proof of the existence of a partnership firm. It is optional for a partnership firm to get registered still most of the partnership firms voluntarily get themselves registered as in case of non-registration, the firm has to face the following consequences

  1. A partner of an unregistered firm cannot file a suit against the firm or other partners.
  2. The firm cannot file a suit against third parties.
  3. The firm cannot file a case against the partners. Hence, to avoid these disadvantages, partnership firms register themselves.

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Question 6.
State the important privileges available to a private company.
Answer:
The following are some of the privileges of a private limited company as compared to a public limited company

  1. The minimum number of members required to form a private company is only two while at least seven people are needed to form a public company.
  2. A private company does not need to issue a prospectus as public is not invited to subscribe to its shares.
  3. Allotment of shares can be done without receiving the minimum subscription.
  4. A private company can start business as soon as it receives the certificate of incorporation and does not have to wait for the receipt of certificate of commencement as in case of a public company.
  5. A private company needs to have only two directors as against the minimum of three directors in the case of a public company.
  6. A private company is not required to keep an index of members unlike a public
  7. There is no restriction on the amount of loans to directors in a private company while in case of a public company permission from the government is required.

Question 7.
How does a co-operative society exemplify democracy and secularism? Explain.
Answer:
The word co-operative means working together with others for a common purpose. The co-operative society is a voluntary association of persons, who join together with the motive of welfare of the members. The membership of a co-operative society is voluntary. A person is free to join a co-operative society and can also leave anytime without any compulsion. The decision making power in a co-operative society lies in the hands of an elected managing committee.

Every member has one vote and this right to vote gives the members a chance to elect the members of the managing committee. All these features lend the co-operative society a democratic character. Further, the membership of a co-operative society is open to all, irrespective of their religion, caste and gender. The co-operative society through its purpose lays emphasis on the values of mutual help and welfare. These features prove the secular nature of co-operative societies.

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Question 8.
What is meant by ‘partner by estoppel? Explain.
Answer:
A partner by estoppel is a person who gives an impression to others that he/she is a partner of the firm through his/her own initiative, conduct or behavior. Such partners are held liable for the debts of the firm because in the eyes of others, they are considered partners, even though they do not contribute capital or take part in its management, e.g., Mr. Sharma is a friend of Mr. Mathur who is a partner in a pharmaceutical firm Health First.

On Mr. Mathur’s request, Mr. Sharma accompanies him to a-business meeting with Wellness Pharmaceuticals and actively participates in the process of negotiation for a business deal and gives the impression that he is also a partner in Health First. If credit is extended to Health First on the basis of these negotiations, Mr. Sharma would also be liable for repayment of .such debt, as if he is acting as the partner of the firm.

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1st PUC Business Studies Forms of Business Organisation Long Answer Questions

Question 1.
What do you understand by a sole proprietorship firm? Explain its merits and limitations?
Answer:
Sole proprietorship refers to a form of business organization which is owned, managed and controlled by an individual who is the incipient of all profits and bearer of all risks. The word “sole” implies “only” and “proprietor” refers to “owner”. Hence, a sole proprietor is the only owner of a business. This form of business is particularly common in small scale business and areas of personalized services.
Features of Sole Proprietorship

(i) Formation and Closure
Very few legal formalities are required to start a sole proprietary business, except in the fields where a license is required. Closure of the business can also be done easily.

(ii) Unlimited Liability
Sole proprietors have unlimited liability. This implies that the owner is personally responsible for payment of debts in case the assets of the business are not sufficient to meet all the debts.

(iii) Sole Risk Bearer and Profit Recipient
The sole proprietor bears the risk of failure of business all alone and also receives all the business profits which are a reward for his risk bearing.

(iv) Control and Decision Making
The sole proprietor has the absolute right to run the business and make all decisions regarding the business without any interference from others. He is the king in all aspects.

(v) No Separate Entity
No distinction is made between the sole proprietor and his business in terms of law as business does not have an identity separate from the owner. The owner is, therefore, held responsible for all the activities of the business.

(vi) Lack of Business Continuity
Sole proprietorship lacks continuity as death, insanity, imprisonment, physical ailment or bankruptcy of the sole proprietor. It will have a negative effect on the business and may even cause closure of the business.

Merits of Sole Proprietorship

(i) Prompt Decision making:
Making The decision making is prompt under sole proprietorship as there is considerable degree of freedom in making business decisions and there is no need to consult others. This results in timely capitalization of market opportunities.

(ii) Confidentiality
All the information related to business operations is kept confidential and secrecy is maintained as the sole decision making authority rests with the proprietor. A sole proprietor is also not bound legally to publish firm’s accounts.

(iii) Direct Incentive
The sole proprietor receives all the business profits as a reward for bearing the business risk. He/she is the single owner and does not need to share profit. This provides an incentive to the sole proprietor to work hard.

(iv) Sense of Accomplishment
There is a sense of personal satisfaction involved in working for oneself. It instills a sense of accomplishment and confidence in the individual.

(v) Ease of Formation and Closure
An important merit of sole proprietorship is the possibility of entering into business with minimal legal formalities. There is no separate law that governs sole proprietorship. As sole proprietorship is the least regulated form of business, it is easy to start and close the business as per the wish of the owner.

Limitations of Sole Proprietorsltip

(i) Limited Resources
Resources of a sole proprietor are limited to his/her personal savings and borrowings from others. Banks and other financial institutions hesitate to provide long term loan to a sole proprietor and hence, the size of the business generally remains small.

(ii) Limited Life of a Business
Concern Death, insolvency or illness of a proprietor has detrimental effects on the business and can lead to its closure.

(iii) Unlimited Liability
A major disadvantage of sole proprietorship is the unlimited liability of the owner. In case of failure of business, the creditors can recover their dues not only from the business assets but also from the personal assets of the proprietor.

(iv) Limited Managerial Ability
Ability An individual may not be good in all managerial tasks such as purchasing, selling, financing, etc. Thus, decision making of a sole proprietor may not be effective in all the cases. Though sole proprietorship suffers from certain limitations, many entrepreneurs opt for this form of organization because it requires less amount of capital and is best suited for small businesses and where customers demand personalized services.

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Question 2.
Why is partnership considered by some to be a relatively unpopular form of business ownership? Explain the merits and limitations of partnership.
Answer:
The Indian Partnership Act, 1932 defines partnership as “the relation between persons who have agreed to share the profit of the business carried on by all or anyone of them acting for all.” Some people consider partnership to be relatively unpopular because the inherent features of partnership such as Joint risk bearing and profit sharing, collective decision making, unlimited liability of partners, etc.

Sometimes lead to conflicts among partners and undue burden on some of the partners. Besides, public confidence in partnership firm is low. But partnership as a form of business organization actually has both merits and limitations as discussed below Merits of Partnership:

(i) Ease of Formation and Closure
A partnership firm can be formed with minima] legal formalities by an agreement between the prospective partners whereby they agree to carry out the business of the firm and share risks. Registration of the firm is also not compulsory. Closure of the ‘ firm can be done easily too.

(ii) Varied Expertise and Effective Decisions
The partners can look after different functions according to their .areas of expertise. This reduces the burden of work on individual partners and leads to more effective decisions.

(iii) More Capital
In partnership, the capital is contributed by many partners. Thus, larger amount of funds are available as compared to a sole proprietor to undertake additional operations when needed.

(iv) Risk Sharing
All the partners share the risks involved in running a partnership firm. This reduces . the anxiety, burden and stress on individual partners.

(v) Secrecy
A partnership firm is not legally required to publish its accounts and submit reports. Hence, it cqn maintain confidentiality of information relating to its operations. Limitations of Partnership

(i) Unlimited Liability
The partners of a firm have unlimited liability. Personal assets may be used for repaying debts if the business assets are insufficient. Further, the partners are Jointly and individually liable for payment of debts. Hence, if some partners are unable to pay the debt proportionate to their share, the others will have to repay the entire debt causing excessive burden on them.

(ii) Limited Resources
Partnership firms usually do not operate on a large scale as there is a restriction on the number of partners and hence, contribution in terms of capital investment remains insufficient for business expansion beyond a point.

(iii) Conflicts:
Decision making authority in a partnership is shared by all the partners. Difference in opinion may thus lead to conflicts between partners. Decisions of one partner are binding on other partners and a wrong decision by one may result in financial problem for all others. If a partner decides to leave the firm due to conflicts, this can result in termination of partnership as there is a restriction on transfer of ownership.

(iv) Lack of Continuity
Partnership comes to an end with the death, retirement, insolvency or lunacy of any partner. It may result in lack of continuity if the remaining partners do no enter into a ‘ fresh agreement to continue the business.

(v) Low Public Confidence
Due to lack of transparency in the business of a partnership firm, the confidence of the public in partnership firms is generally low. It is difficult for the public to ascertain . the true financial status of a partnership firm as it is not legally required to publish its financial reports or make other related information public.

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Question 3.
Why is it important to choose an appropriate form of organization? Discuss the factors that determine the choice of form of organization.
Answer:
After studying various forms of business organizations, it is evident that each form has certain advantages as well as disadvantages. .
The important factors determining the choice of organization are discussed below:

(i) Cost and Ease of Starting Business
Sole proprietorship is started easily as far as initial business setting-up costs and legal requirements are concerned, in case of partnership also, the advantage of less legal formalities and lower cost is there because of limited scale of operations. Registration is compulsory in case of co-operative societies and companies. Formation of a company involves a lengthy and expensive legal procedure.

(ii) Liability
In case of sole proprietorship and partnership firms, the liability of the owners/partners is unlimited. This may result in payment of debt from personal assets of the owners. In Joint Hindu family business, only the karta has unlimited liability. In co-operative societies and companies, however, liability is limited and creditors can force payment of their claims only to the extent of the company’s assets.

(iii) Continuity
The continuity of sole proprietorship and partnership firms is affected by events such 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, co-operative societies and companies.

(iv) Managerial Ability
It is difficult for a sole proprietor to have expertise in all functional areas of business. In other forms of organizations like partnership and company, there is division of work among the members which allows the managers to specialize in specific areas, leading to better decision making. But this may sometimes lead to conflicts due to
differences of opinion. Company form of organization is a better alternative if the operations are complex in nature and require professional management.

(v) Capital Requirements
For large scale operations, company form are the most suitable as large amount of funds can be arranged by issuing shares in this form. For medium and small sized business, one can opt for partnership or sole proprietorship. Capital requirements for expansion can also be met more easily in company form.

(vi) Degree of Control
Sole proprietorship provides direct control over operations and absolute decision making power. But if the owners want to share control for more effective decision making, partnership or company form of organization can be adopted. In company form of organization, professionals are appointed to manage the affairs of a company as there is complete separation of ownership and management.

(vii) Nature of Business
Sole proprietorship is more suitable for businesses in which direct personal contact is needed with the customers such as in the case of a beauty parlor or grocery store. The company form of organization is suited for large manufacturing units. Partnership form is much more suitable in case of professional services. The factors stated above are inter-related and therefore, all the relevant factors must be taken into consideration while making a decision with respect to the form of organization.

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Question 4.
Discuss the characteristics, merits and limitations of co-operative form of organization. Also describe briefly different types of co-operative societies.
Answer:
According to The Indian Co-operative Societies Act, 1912, “Co-operative organization is a society which lias its objectives for the promotion of economic interests of its members in accordance with co-operative principles.”
Features of a Co-operative Society

(i) Voluntary Membership
The membership of a co-operative society is voluntary. There is no compulsion for anyone to join or quit a society after serving a notice procedurally. Membership is open to all, irrespective of their religion, caste and gender.

(ii) Legal Status
Registration of a co-operative society is compulsory. This accords a separate identity to the society which is distinct from its members. The society can enter into contracts and hold property in its name, sue and be sued by others. As a result of being a separate legal entity, it is not affected by the entry or exit of its members.

(iii) Limited Liability: The liability of the members of co-operative society is limited to the extent of the amount contributed by them as capital. This defines the maximum risk that a member can be asked to bear.

(iv) Control lit a co-operative society: the power to take decisions lies in the hands of an elected managing committee. The right to vote gives the members a chance to choose the members who will constitute the managing committee and this leads the co-operative society a democratic character.

(v) Service Motive: The co-operative society through its purpose lays emphasis on the values of mutual help and welfare. Hence, the motive of service dominates its working. If any surplus is generated as a result of its operations, it is distributed amongst the members as dividend in conformity with the bye-laws of the society. Merits of Co-operative Society

(i) Equality in Votes
Co-operative society is governed by the principle of one man one vote’. Each member is entitled to equal voting rights irrespective of the amount of capital contributed by a member.

(ii) Limited Liability
The liability of members of a co-operative society is limited to the extent of their capital contribution and hence, the personal assets of the members cannot be used to repay business debts.

(iii) Continuity
Death, bankruptcy or insanity of the members do not affect continuity of a co-operative society.

(iv) Economy in Operations
The focus of co-operative society is on elimination of middlemen which helps in reducing costs. The members generally offer honorary services to the society and the risk of bad debts is lower as customers or producers are members of the society too.

(v) Government Support
The co-operative society is supported by the government in the form of low taxes, subsidies and low interest rates on loans.

(vi) Ease of Formation
The co-operative society can be started with a minimum of ten members and the registration procedure is done under Co-operative Societies Act, 1912.
Limitations of Co-operative Society

(i) Limited Resources
Capital contributions in a cooperative society are from the members with limited means.

(ii) Inefficient Management
The members of co-operative societies are not professionals and offer honorary services on a voluntary basis. They are not equipped to carry out the management functions effectively.

(iii) Lack of Secrecy
It is difficult to maintain secrecy about the operations of a co-operative society due to open discussions in the meetings and disclosure obligations as per the Societies Act, (7).

(iv) Government Regulations
Co-operative societies have to comply with several rules and regulations related to auditing of accounts, submission of accounts, etc and also work under control of state co-operative departments.

(v) Internal Conflicts
Internal conflicts arise when personal interests start dominating the welfare motive.

Types of Co-operative Societies

(i) Consumer’s Co-operative Societies
The consumer co-operative societies are comprises to protect the interests of consumers as its aim is eliminating middlemen to achieve economy in operations and provide good quality products at reasonable prices. It purchases goods in bulk directly from the wholesalers and sells goods to the members
.
(ii) Producer’s Co-operative Societies
These societies are comprise to protect the interest of small producers and are set up to provide the supplying of raw materials, equipment and other inputs to the members and buying their output for sale. Profits among the members are distributed on the basis of their contributions to the society.

(iii) Marketing Co-operative Societies
Such societies consist to help the small producers who wish to obtain reasonable prices for their output and want to market their products. Its members Jointly perform marketing functions like transportation, warehousing, packaging, etc to sell the output at the best possible price and profits are distributed according to each member’s contribution to the pool of output.

(iv) Farmer’s Co-operative Societies
These societies comprise of farmers as members who Jointly take up farming activities to gain the benefits of large scale farming and increase the productivity. Such societies ’provide better quality seeds, fertilizers, machinery and other modern techniques to member farmers.

(v) Credit Co-operative Societies –
Credit co-operative societies are formed for providing easy credit on reasonable terms to the members. These societies provide loans at low rates to members out of the amounts collected as capital and deposits from the members thereby eliminating exploitation by moneylenders.

(vi) Co-operative Housing Societies
Co-operative housing societies help people with low income to construct houses at reasonable costs and giving them the option of paying in installments. These societies construct flats or provide plots to members for construction of houses.

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Question 5.
Distinguish between a Joint Hindu family business and partnership.
Answer:

Basis of Comparison Partnership Joint Hindu Family Business
Formation Easy formation with an agreement between partners. Easy formation with less legal formalities than partnership.
Registration Requirement Registration is optional. Exemption from registration.
9 Members Minimum members should be 2 and maximum 10 for banking and 20 for others. At least two persons for division of family property with no maximum limit of members.
Capital contribution Limited but more than that can be raised in case of sole proprietorship. The capital contribution comes from ancestral property.
Liability Liability of members is unlimited and Joint. Liability is unlimited only for Karta while it is limited for other members.
Control and Management Partners take decisions Jointly and consent of all partners is needed Karta takes decisions which are binding on other members.
Continuity Stable but affected by status of partners. Stable business, continues even in Karta dies through succession in family.

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Question 6.
Despite limitations of size and resources, many people continue to prefer sole proprietorship over other forms of organization? Why?
Answer:
Sole proprietorship refers to a form of business organization which is owned, managed and controlled by an individual who bears all risks and receives all profits. This form of business is suited mainly in areas of personalized services and small scale activities due to shortage of capital and limited abilities of an individual who is the proprietor. Still many people continue to prefer sole proprietorship over other forms of organization as sole proprietorship offers many advantages such as:

(i) Prompt Decision Making
The decision making is prompt under sole proprietorship as there is considerable degree of freedom in making business decisions and there is no need to consult others as in case of partnership or co-operative societies. This results in effective capitalization of market opportunities as and when they arise.

(ii) Confidentiality
All the information related to business operations is kept confidential and secrecy is maintained as the sole decision making authority rests with the proprietor unlike partnership or co-operative form. A sole proprietor is also not bound legally to publish firm’s accounts as in case of a company.

(iii) Incentive to Work
The sole proprietor receives all the business profits as a reward for bearing the business risk. He is the single owner and does not need to share profit. This provides an incentive to the sole proprietor to work hard.

(iv) Sense of Accomplishment .
There is a sense of personal satisfaction involved in working for oneself. It instills a sense of accomplishment and confidence in the individual as he/she is the one who from others which is present in all other forms of organization.

(v) Ease of Formation and Closure
An important merit of sole proprietorship is the possibility of entering into business with minimal legal formalities. There is no separate law that governs sole proprietorship unlike other forms like co-operative societies or company. As sole proprietorship is the least regulated form of business, it is easy to start and close the business as per the wish of the owner.

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1st PUC Business Studies Forms of Business Organisation Application Questions

Question 1.
In which form of organization is a trade agreement made by one owner binding on the others? Give reasons to support your answer.
Answer:
In partnership form of organization, a trade agreement made by one owner is binding on the others. The Indian Partnership Act, 1932 defines partnership as “the relation between persons who have agreed to share the profit of the business carried on by all or anyone of them acting for all.” The definition of partnership highlights the fact that it is a business carried on by all or anyone of the partners acting for all.

One partner is an agent of other partners as he/she represents them and thereby binds them through his/her acts. He is a principal as he/she too can be bound by the acts of other partners. Hence, every partner is both an agent and a principal. This is the reason why a trade agreement made by one owner is binding on the others.

Further, the partners are Jointly responsible for the payment of debts and they contribute in proportion to their share in business and as such are liable to that extent. The partners share amongst themselves the responsibility of decision making and control of day-to-day activities.

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Question 2.
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 creditors approach for repayment of debt?
Explain giving reasons.
Answer:
(a) The organization is a sole proprietorship firm : Sole proprietors have unlimited liability. This implies that the owner is personally responsible for payment of debts in case the assets of the business are not sufficient to meet all the debts. As such the owner’s personal possessions such as his/her persona! car and other assets could be sold for repaying the debt. In the given case, the total debts that remain unpaid.are Rs. 80,000 but the organizational assets amount to Rs.50,000 only. In such a situation, the creditors can demand from the proprietor to pay Rs.3 0,000 from his/her personal sources even if he/she has to sell his/her personal property to repay the firm’s debts,

(b) The organization is a partnership firm with Anthony and Akbar as partners. The partners of a firm have unlimited liability. Personal assets may be used for repaying debts in case the business assets are insufficient. As the total debts that remain unpaid are Rs. 80,000 but the organizational assets amount to Rs, 50,000 only, the creditors can demand from both or any of the partners Anthony and Akbar to pay Rs. 30,000 from their personal sources even if they have to sell their personal property to repay the firm’s debts.

In the given situation, creditors can demand the payment of debt from both Anthony and Akbar as the partners are Jointly liable for payment of debts and they contribute in proportion to their share in business as they are liable to that extent. However, if one of them is not available or is unable to pay, the other partner will have to pay the creditors as each partner can be held responsible for repaying the debts of the ‘ business. Such a partner can later recover from the other partner an amount of money equivalent to the share in liability defined as per the partnership agreement.

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Question 3.
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 a company 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 form of the organization?
(d) What legal formalities will she have to undergo to operate business as a 1 company?
Answer:
(a) Kiran may have the following two benefits of remaining a sole proprietor. .

  1. Being the sole proprietor Kiran can enjoy all the profit earned from the business without having the need to share it with anyone.
  2. She does not have to publish accounts or be regulated under any law governing sole proprietorship which maintains secrecy of the business activities.

(b) Kiran may have the following two benefits of converting to a Joint Stock Company.

  1. She will be able to acquire the funds required for expansion of her retail chain branches countrywide through share capital in a Joint Stock Company.
  2. Public has more faith in a Joint Stock Company than in a sole proprietorship firm which will help in increasing the customer base for Kiran’s business.

(c) Her decision to go nationwide involves an increase in her scale of operation, requirement of capital and management abilities. As a sole proprietor, she may face limitations of resources and her limited managerial ability. She may not be good in all managerial tasks such as purchasing, selling, financing, etc.

Thus, her decision making may not be effective in all the situations especially when there are complexities of large scale operation. Besides, she will have to bear more risk individually if she remains a sole proprietor and her liability will increase to a large extent. All these factors will definitely play a role in her choice of form of organization and she will have much stronger reasons to form a Joint Stock Company in this case.

(d) The formation of a company requires greater time, effort and extensive knowledge of legal requirements and the procedures involved. To operate her business as a company, first of all, Kiran will have to prepare several documents and will have to ensure compliance with several legal requirements before it can start functioning. She will have to register her company. Registration of the company is compulsory as provided under the Indian Companies Act, 1956.

The Companies Act requires each public company to provide a lot of information to the office of the registrar of companies from time-to-time which Kiran will have to provide. The functioning of a company is subject to many legal provisions and compulsions. A company has to comply with various restrictions including audit, voting, filing of reports and preparation of documents, and is required to obtain various certificates from different agencies such as registrar, SEBI, etc.

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1st PUC Business Studies Forms of Business Organisation Additional Questions And Answers

1st PUC Business Studies Forms of Business Organisation Multiple Choice Questions

Question 1.
The form of business organization that has the largest sales volume is the:
a. partnership.
b. corporation.
c. cooperative.
d. multinational.
Answer:
b. corporation.

Question 2.
The simplest form of business ownership is a:
a. proprietorship.
b. partnership.
c. corporation.
d. cooperative.
Answer:
a. proprietorship.

Question 3.
Which of the following is an advantage of a sole proprietorship?
a. ease of starting a business.
b. being your own boss,
c. pride of ownership.
d. all of the above.
Answer:
d. all of the above.

Question 4.
The main disadvantage of a general partnership is:
a. the unlimited liability of the partners.
b. disagreement amongst partners.
c. shared management.
d. difficulty of termination.
Answer:
a. the unlimited liability of the partners.

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Question 5.
A …………………. is a business with two or more owners:
a. corporation.
b. conglomerate,
c. partnership.
d. public corporation.
Answer:
c. partnership.

Question 6.
A partner who is not actually involved in the partnership but lends his name for public relations purposes is a:
a. silent partner.
b. general partner,
c. nominal partner.
d. dominant partner.
Answer:
c. nominal partner.

Question 7.
A …………………. partner is an owner who has unlimited liability and is active in managing the firm:
a. senior partner.
b. general partner.
c. silent partner.
d. limited partner.
Answer:
b. general partner.

Question 8.
Which of the following is an example of a public corporation?
a. Imperial Oil.
b. Hospital for Sick Children,
c. Mouvement Caisse Desjardin.
d. YMCA.
Answer:
a. Imperial Oil.

Question 9.
Which of the following is probably the most important reason for incorporating?
a. limited liability of shareholders.
b. more money for investment.
c. increased flexibility.
d. shared management.
Answer:
a. limited liability of shareholders.

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Question 10.
Which of the following is an example of a non-profit organization?
a. Royal Bank.
b. YMCA.
c. BCE.
d. Air Canada.
Answer:
b. YMCA.

Question 11.
A …………………. provides for the greatest degree of continuity:
a. general partnership.
b. Joint venture.
c. corporation.
d. sole proprietorship.
Answer:
c. corporation.

Question 12.
The major advantage of a franchise is:
a. training and management assistance.
b. personal ownership
c. nationally recognized name.
d. all of the above.
Answer:
d. all of the above.

Question 13.
Which of the following is a characteristic of a co-operative society?
a. profits are not subject to income tax.
b. one vote per share.
c. dividends are paid on a per share basis.
d. all of the above.
Answer:
a. profits are not subject to income tax.

Question 14.
The most effective form of business organization for raising capital is the:
a. Joint venture.
b. partnership.
c. corporation.
d. proprietorship.
Answer:
c. corporation.

Question 15.
Co-operatives play an important role in:
a. aerospace.
b. agriculture.
c. manufacturing.
d. all of the above.
Answer:
b. agriculture.

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1st PUC Business Studies Forms of Business Organisation Short Answer Questions

Question 1.
Name the form of organisation which is owned, managed and controlled by an individual who is the rccipient.of all profits and bearer of all risks.
Answer:
Sole proprietorship

Question 2.
Name the business organisation which is suitable for business requiring personalized services.
Answer:
Sole proprietorship

Question 3.
Name the form of business organisaiton where there is no separate law for either formation or closure of business.
Answer:
Sole proprietorship

Question 4.
Name the nature of liability of a sole proprietor.
Answer:
It is owned and managed by a single person and has unlimited liability.

Question 5.
Name the form of business organisation where the members are Jointly as well as individually liable for payment of debts.
Answer:
Partnership.

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Question 6.
Name the business organisation where every member is an agent as well as a
principal of each other.
Answer:
Partnership

Question 7.
How does the partnership come into business?
Answer:
Through an agreement among the partners

Question 8.
How is the risk involved in running the business borne by the partners?
Answer:
Jointly and severally

Question 9.
What do you understand by mutual agency?
Answer:
The partnership business can be carried on by one or some of the person on behalf of others.

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Question 10.
State any two merits of partnership.
Answer:
The two merits of partnership are:

  1. A partnership enjoys flexibility in operations. The operations of a partnership can be easily adjusted or changed according to changing business conditions.
  2. A partnership is not subject to strict Government control. Therefore, it enjoys greater freedom in administration.

Question 11.
Name the form of business organisation which is found only in India.
Answer:
Hindu undivided family business

Question 12.
Who ow ns the business of a Hindu Undivided Family?
Answer:
The members of Hindu Undivided Family

Question 13.
Name the two systems that govern membership in the Joint Hindus family
business.
Answer:
The two systems that govern membership in the Joint Hindus family business are:

  1. A Joint Hindu family firm is governed by the general rules of Hindu law.
  2. A Joint Hindu family firm is recognised as a.separate entity by law.

Question 14.
Name the system which allows both male and female members of the family business to co-parceners.
Answer:
Hindu succession Act, in 2005 mitakshara law

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Question 15.
What are the basic requirements for the formation of a Joint Hindu family business.
Answer:
At least two members and ancestral property

Question 16.
Name the form of business organisation which has voluntary membership and is created for the welfare of its members.
Answer:
Co-operative society

Question 17.
Define a co-operative society.
Answer:
According to the Indian Co-operative Societies Act, 1912,”A co-operative society is a society which has its objective the promotion of the interests of its member in accordance with co-operative principles.”

Question 18.
What is the main motive of a co-operative society?
Answer:
The main motives of a co-operative society are:

  1. Open membership .
  2. Equity of Distribution of Profits.

Question 19.
What is the principle that governs the working of co-operative societies?
Answer:
One man, one vote

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Question 20.
Define the term business enterprises.
Answer:
Business enterprises mean state ownership and operation of industrial, agricultural, financial and commercial undertakings”.

Question 21.
What do you understand by business undertakings? Describe the various types of business undertakings.
Answer:
Business ownership means and institutional arrangement to conduct business activities.

The various types of business undertakings are:

  1. Sole proprietorships
  2. Partnership firms
  3. Joint Hindu Family firms
  4. Joint stock companies
  5. Co-operative societies
  6. Multinational companies.

Question 22.
Define sole proprietorship.
Answer:
According to Wheeler,” The sole proprietorship is that form of business ownership whicn is owned and managed, controlled by single individual. He receives all the profits and risks all”.

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Question 23.
List the merits of sole proprietorship.
Answer:
The merits of sole proprietorship are:

  1. As the sole proprietor can get all the profits of the business, he is encouraged to work had for the efficient running of the business.
  2. The sole proprietor is the master of his business. He need not consult and other persons, while taking decisions relating to business matters.

Question 24.
State the limitations of sole proprietorship.
Answer:
The limitations of sole proprietorship are:

  1. The capital of sole proprietor is limited. Therefore, he cannot expand the size of his business.
  2. As the sole proprietor is the sole owner of the business, he has to bear all the losses of the business.

Question 25.
State the suitability of sole proprietorship.
Answer:
The suitability of sole proprietorship are:

  1. It is suitable where the business activities are seasonal.
  2. It is suitable where the business affairs are required to be kept secret.

Question 26.
Define a Joint Hindu family business.
Answer:
A Joint Hindu family firm refers to the firm owned by a join Hindu family. In short, the firm or business belonging to a Joint Hindu family is called a Joint Hindu family firm.

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Question 27.
What do you understand by co-parcener?
Answer:
All HUF members have equal ownership right over the property of an ancestor and they are known as ‘Co-parceners’.

Question 28.
Define partnership.
Answer:
The Indian Partnership Act, 1932 defines ‘partnership’ as “the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all”.

Question 29.
What is limited partnership?
Answer:
A partnership which has one or more limited partner in addition to one or more general partners is called “Limited partnership”.

Question 30.
What is partnership at will?
Answer:
Where no provision is made in the contract between the partners for the duration of » their partnership or for the termination of their partnership. The partnership is called “partnership at will”.

Question 31.
What is meant by partner by holding out?
Answer:
A partner by holding our is a person who is held liable as a partner of the firm to any outsider to whom he has been represented as a partner and who has granted credit to the firm on the faith of that representation. Such a partner is a partner by holding out.

Question 32.
What is partnership deed?
Answer:
When the partnership agreement is put in writing, duly stamped and signed by all the partners, the documents containing the partnership agreement is called the partnership deed.

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Question 33.
Mention three advantages of partnership.
Answer:
The three advantages of partnership are:

  1. The unlimited, Joint and several liabilities of the partners make them carry on the business of the firm and enable it to obtain credit from third parties easily.
  2. As there are two or more persons in partnership, there is scope for the application of division of labour.
  3. A partnership is an association of two or more persons. Therefore, it can secure
    greater managerial ability than a sole trading concern.

Question 34.
Mention three limitations of partnership.
Answer:
The three limitations of partnership are:

  1. As the number of partner is limited to ten in the case banking business, and to twenty in the case of any other business, the capital that can be collected by a , partnership is limited.
  2. A partnership firm lacks continuity of existence. The death, insolvency, insanity or retirement of a partner may put an end to the partnership business.
  3. Owing to the absence of strict Government control and lack of publicity of its . accounts, a partnership concern cannot enjoy public confidence.

Question 35.
Define a co-operative society.
Answer:
According to the Indian Co-operative Societies Act, 1912,”A co-operative society is a society which has its objective the promotion of the interests of its member in accordance with co-operative principles.”

Question 36.
State the different types of co-operative societies.
Answer:
The important types of co-operative societies.

  1. Co-operative credit societies.
  2. Co-operative marketing societies
  3. Consumers co-operative societies
  4. Producers co-operative societies
  5. Co-operative housing societies ‘
  6. Co-operative farming societies.

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1st PUC Business Studies Forms of Business Organisation Long Answer Questions

Question 1.
What do you understand by sole proprietorship? Discuss its distinctive features.
Answer:
According to Wheeler,” The sole proprietorship is that form of business ownership which is owned and managed, controlled by single individual. He receives all the profits and risks all”.

The features of a sole proprietorship are as follows:

  1. As it is owned by a single owner, he invests all the capital himself. However, if his capital is insufficient for the business, he borrows from his relatives, friends or bands.
  2. The sole proprietor puts his own labour in conducting his business. If necessities arise, he makes use of the services of the members of his family. He may also employ a few paid assistants to help him in his business.
  3. The sole proprietorship is the oldest and the simplest form of business organisation.
  4. No legal formalities are required for the formation and. the closure of a sole proprietorship.
  5. It is owned and managed by a single person.

Question 2.
What is Joint Hindu family business? What are its main characteristics?
Answer:
A Joint Hindu family firm refers to the firm owned by a joint Hindu family. In short, the firm or business belonging to a Joint Hindu family is called a Joint Hindu family firm.

The chief characteristics of Joint Hindfamily firm are:

  1. A Joint Hindu family firm is recognized as a separate entity by law.
  2. A Joint Hindu family firm is not dissolved by the death, insolvency or insanity of any co-parcener. It is not dissolved even on the death, insolvency or insanity of the Karta.
  3. A Joint hind family firm is government by the general rules of Hindu law.
  4. It is owned by all the co-parceners.

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Question 3.
What is partnership deed/ discuss its contents.
Answer:
When the partnership agreement is put in writing, duly stamped and signed by all the partners, the documents containing the partnership agreement is called the partnership deed.

Contents of partnership deed:

  1. The name of the firm.
  2. The names and addresses of the partners.
  3. The date of commencement of partnership.
  4. The nature of the business which the firm proposes to undertake.
  5. The manner in which additional capital is to be introduced by the partner in future.

Question 4.
Explain the procedure for registration of a partnership firm. What are the consequences of non-registration?
Answer:
The statement should contain the following details:

  1. Name of the firm.
  2. Location of the firm.
  3. Names of other places where the firm carries on business.
  4. Date on which each partner joined the firm.
  5. Names and addresses of all the partners.
  6. Duration of the firm.

The unregisteredfirm suffers from certain disabilities. They are:

  1. A partner of an unregistered firm cannot file a suit in court of law against the third parties or against the firm or against his co-partners for the recovery of the claims.
  2. An unregistered firm cannot file as suit in a court of law against the third parties for the recovery of its debts exceeding Rs. 100
  3. An unregistered firm cannot file a suit against any of its partners for the recovery of its debts.

Question 5.
Explain the characteristics of partnership.
Answer:
The characteristics of partnership are:

i. Business: The agreement between the partners must be carrying on some business. It is for this reason that an agreement between persons to carryon some charitable work or to share the income from a property or to divide the goods purchased in bulk cannot be regarded as partnership, and the persons cannot be considered partners, because, in none of these cases, business is carried on.

ii. Agreement: A partnership arises only from an agreement between the persons who wish to form the partnership.
iii. Sharing of profits: The agreement between the partners to carry on business must be with the object of earning profits and sharing of such profits amongst all the partners.

iv. Mutual agency: The business of partnership may be carried on by all the partners or by any of them acting for all.
v. No separate entity: In the eyes of law, a partnership firm and its partners are ‘ regarded as one and the same person.

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Question 6.
Explain the different types of partnership.
Answer:
On the basis of liability, partnerships may be divided into two classes.

1. General Partnership or Unlimited partnership: A partnership which has only general partners is called “General partnership”. The partners whose liability is unlimited are called “General partners.”

2. Limited partnership: In a general partnership, the liability of every partner unlimited. This has proved to be a serious drawback from the growth of partnership organization. In order to remove the drawback of “unlimited liability”. Limited partnership has been introduced in Western European countries and in U.S. A. This type of partnership is governed by a separate act called the Limited partnership Act. This type of partnership is not permitted by law in India.

A partnership which has one or more limited partners in addition to one or more general partners in called ‘Limited Partnership”. The partners whose liability is limited to the extent of capital contributed by them are called “limited partner” or “special partners”.

From tlte point of view of duration, partnerships may be classified into three kinds they are:

  1. Partnership for a fixed term
  2. Particular partnership
  3. Partnership at will.

i. Partnership for a fixed term: When a partnership is formed for a fixed term (i.e., for a particular period), it is called partnership for a fixed term. A partnership for a fixed term comes to an end on the expiry of the fixed period. It may be noted that a partnership formed for a fixed period may be continued even after the expiry of the fixed period, if the partners decide to continue their partnership after the expiry of the period, the rights and obligations of the partners will remain the same as before, and the partnership will become partnership at

ii. Particular partnership: When a partnership is formed for a particular venture (i.e., undertaking or business), it is called particular partnership. A partnership formed for a specified or particular venture comes to an end on the completion of the specified venture. As in the case of a partnership formed for a fixed term, a particular partnership also can be continued even after the completion of the particular venture, if the partners decide to continue their t partnership after the completion of the particular venture.

iii. Partnership at will: Where no provision is made in the contract between ‘ the partners for the duration of their partnership or- for the termination of their partnership, the partnership is called “partnership at will”, f As the duration is not fixed in the case of partnership at will, the partnership at will is uncertain and indefinite. Such a partnership can be dissolved at any time at the will and pleasure of any partner

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Question 7.
Distinguish between or sole proprietorship and partnership,
Answer:
The main differences between sole proprietorship and partnership firm are as follows:

Sole Proprietorship Partnership Firm
1. In a sole proprietary concern, the entire work has to be done by a single individual. 1. In a partnership firm, the work can be distributed among the partners according to their ability, experience and qualification.
2. A sole proprietary concern does not provide opportunities for the discussion of business problem. 2. A partnership firm provides opportunity for the discussion of business problems. The discussion results in better decisions.
3. A sole proprietorship cannot maintain personal contact with customers to a greater extent. 3. A partnership firm can maintain personal contact with customers to a greater extent.
4. In a sole proprietary concern, all the risks of business are undertaken by a single person. 4. In a partnership firm, the risks of business . are shared by two or more persons.
5. In a sole proprietary cancern, the entire profits are enjoyed by a single person. 5. In a partnership firm, the profits are shared among two or more persons.
6. A sole proprietorship is owned by a single person. 6. A partnership firm is owned by two or more persons.
7. The capital of sole proprietary concern is limited, as it is contributed by a single person. 7. The capital of a partnership firm is large, as it is contributed by two or more persons.
8. The managerial ability of a sole proprietorship is limited, as it is provided by a single person. 8. The managerial ability of a partnership firm is great, as it is provided by two or more talented persons.
9. The scope for expansion is limited in a sole proprietorship, as its capital and managerial ability are limited. 9. There is greater scope for expansion in a partnership firm, as there is opportunity for obtaining more capital and more managerial ability from many persons.
10. There is no provision for the registration of a sole proprietary concern. 10. A partnership firm may be registered under the Indian partnership act of 1932.

Disadvantages of a co-operative society are:

  1. Secrecy of business affairs, which is very essential for the success of any business enterprise, is lacking in a co-operative society.
  2. A co-operative society is not able to enjoy public confidence because of the failure of many co-operative societies.
  3. Co-operative societies are subject to excessive state interference. Excessive state interference affects the successful working of the co-operative societies.
  4. The success of a co-operative society depends upon the loyalty of its members. But it is often found that the members do not remain loyal to their society.
  5. A co-operative, society suffers from inadequate capital.
  6. A co-operative society cannot undertake large-scale operation because of its limited financial resources and managerial ability.

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