NCERT Solutions for Class 11 Business Studies Chapter 2: Forms of Business Organisation

Chapter at a glance

Exercises – Short Answer Questions

Question SA – Q1

Compare the status of a minor in a Joint Hindu family business with that in a partnership firm.

Answer

Question SA – Q2

If registration is optional, why do partnership firms willingly go through this legal formality and get themselves registered? Explain.

Answer

Registration under the Indian Partnership Act, 1932 is optional, but an unregistered firm suffers serious disabilities, so firms prefer to register:

1. Suits against third parties — an unregistered firm cannot file a case against outsiders (e.g. to recover dues).
2. Suits between partners and the firm — a partner of an unregistered firm cannot sue the firm or other partners to enforce rights under the partnership deed.
3. Claim of set-off — the firm cannot claim set-off (adjustment of mutual dues) in a suit filed against it.
4. Credibility — registration provides proof of existence of the firm and of its partners, building confidence of banks, suppliers and customers.

Thus registration protects the firm’s and partners’ legal rights.

Question SA – Q3

State the important privileges available to a private company.

Answer

1. It can be formed with only two members (one in case of One Person Company), against seven for a public company.
2. It needs only two directors (public company needs three).
3. It need not issue a prospectus, as it cannot invite the public to subscribe to its shares.
4. It can allot shares without receiving minimum subscription.
5. It can commence business immediately after incorporation, without a separate certificate.
6. It need not keep an index of members and enjoys some relaxations in holding meetings.
7. There is no restriction on managerial remuneration as applicable to public companies.

Question SA – Q4

How does a cooperative society exemplify democracy and secularism? Explain.

Answer

Democracy

1. Management is in the hands of a managing committee elected by the members.
2. The principle of “one member, one vote” applies, whatever the number of shares held — the rich cannot dominate.
3. Members have the right to take part in decisions at general meetings.

Secularism

1. Membership is voluntary and open to all, irrespective of religion, caste, gender or status.
2. No one is excluded or favoured on religious grounds; the society works for the common economic interest of all members.

Question SA – Q5

What is meant by ‘partner by estoppel’? Explain.

Answer

A partner by estoppel is a person who is not actually a partner but, by his own words, conduct or behaviour, gives an impression to outsiders that he is a partner of the firm. If a third party gives credit to the firm believing this, that person is held liable for the debts of the firm like a real partner. He cannot later deny that he is a partner (he is “estopped” from denying it). He has no right to profits or management of the firm.

Example: Ravi, a friend of the partners, tells a supplier “I am a partner in this firm”; the supplier sells goods on credit relying on this. Ravi is liable to the supplier.

Question SA – Q6

Briefly explain the following terms in brief: (a) Perpetual succession (b) Common seal (c) Karta (d) Artificial person

Answer

Exercises – Long Answer Questions

Question LA – Q1

What do you understand by a sole proprietorship firm? Explain its merits and limitations?

Answer

Meaning: A sole proprietorship is a business owned, managed and controlled by one person, who is the sole recipient of profits and bears all losses. It is common in retail shops, beauty parlours, small workshops and personal services.

Merits

1. Quick decision making — the owner need not consult anyone.
2. Confidentiality — business information stays with the owner.
3. Direct incentive — all profits go to the owner, motivating hard work.
4. Sense of accomplishment — personal satisfaction of running one’s own business.
5. Ease of formation and closure — few legal formalities and low cost.
6. Personal touch with customers and employees.

Limitations

1. Limited resources — capital is limited to the owner’s savings and borrowings.
2. Limited life — the business may end with the death, illness or insolvency of the owner.
3. Unlimited liability — personal assets can be used to pay business debts.
4. Limited managerial ability — one person cannot be expert in all areas.
5. Growth and expansion are restricted.

Question LA – Q2

Why is partnership considered by some to be a relatively unpopular form of business ownership? Explain the merits and limitations of partnership.

Answer

Partnership is considered relatively unpopular because of unlimited and joint liability, the possibility of conflicts among partners, lack of continuity and limited capital compared to companies; the act of one partner binds all.

Merits

1. Easy formation and closure — only an agreement is needed; registration optional.
2. Balanced decision making — partners pool their skills and knowledge.
3. More funds than a sole proprietorship.
4. Sharing of risks among partners.
5. Secrecy — accounts need not be published.

Limitations

1. Unlimited liability — partners are personally liable, jointly and severally.
2. Limited resources — maximum 50 partners restricts capital.
3. Possibility of conflicts due to differences of opinion.
4. Lack of continuity — death, retirement or insolvency of a partner may end the firm.
5. Lack of public confidence — no publication of accounts.

Question LA – Q3

Why is it important to choose an appropriate form of organisation? Discuss the factors that determine the choice of form of organisation.

Answer

Importance: The form of organisation decides who owns and controls the business, how much capital can be raised, the extent of owners’ liability, how profits are shared, the continuity of the business and the legal formalities. A wrong choice can lead to shortage of funds, excessive personal risk or management problems. Hence the choice must be made carefully at the start.

Factors determining the choice

Question LA – Q4

Discuss the characteristics, merits and limitations of cooperative form of organisation. Also describe briefly different types of cooperative societies.

Answer

Characteristics

1. Voluntary membership — anyone can join or leave.
2. Legal status — compulsory registration under the Cooperative Societies Act; separate legal entity.
3. Limited liability — limited to the capital contributed.
4. Democratic control — one member, one vote.
5. Service motive — primary aim is service to members.

Merits: equality in voting, limited liability, stable existence, economy in operations (voluntary services), support from government (tax relief, low-interest loans), ease of formation.

Limitations: limited resources (small contributions), inefficiency in management (lack of professionals), lack of secrecy, government control and interference, differences of opinion among members.

Types of cooperative societies

Question LA – Q5

Distinguish between a Joint Hindu family business and partnership.

Answer

Question LA – Q6

Despite limitations of size and resources, many people continue to prefer sole proprietorship over other forms of organisation. Why?

Answer

People continue to prefer sole proprietorship because:

1. Easy and cheap to start — no legal formalities except licences; it suits people with small capital.
2. Full control — the owner alone takes decisions and enjoys freedom.
3. Direct reward — the entire profit belongs to the owner, giving strong motivation.
4. Quick decisions — the owner can seize opportunities immediately.
5. Secrecy — business information remains private.
6. Personal relationship with customers, important in retail and personal services.
7. Ease of closing — the business can be wound up any time.
8. Self-employment and satisfaction — a sense of being one’s own boss.

These advantages outweigh the limitations for small businesses in local markets, which is why sole proprietorship remains the most common form.

Application Questions

Question App – Q1

In which form of organisation is a trade agreement made by one owner binding on the others? Give reasons to support your answer.

Answer

In a partnership firm. Partnership is based on the principle of mutual agency: every partner is both an agent (who can bind the other partners by his acts done in the ordinary course of business) and a principal (who is bound by the acts of the other partners). Hence a trade agreement made by one partner on behalf of the firm is binding on all the partners. (In a Joint Hindu family business only the Karta can bind the business; in a company only authorised officers can.)

Question App – Q2

The business assets of an organisation amount to ₹ 50,000 but the debts that remain unpaid are ₹ 80,000. What course of action can the creditors take if (a) The organisation is a sole proprietorship firm (b) The organisation 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) Sole proprietorship: The proprietor has unlimited liability. Creditors can recover ₹ 50,000 from the business assets and the balance ₹ 30,000 from the personal assets of the proprietor (his house, car, savings, etc.).

(b) Partnership: Partners have unlimited, joint and several liability. After using the firm’s assets of ₹ 50,000, creditors can recover the balance ₹ 30,000 from the personal assets of either Anthony or Akbar or both. They may approach any one partner for the whole amount; that partner can later claim contribution from the other partner according to their agreement.

Question App – Q3

Kiran is a sole proprietor. Over the past decade, her business has grown from operating a neighbourhood 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 organisation? (d) What legal formalities will she have to undergo to operate business as a company?

Answer

(a) Benefits of remaining a sole proprietor:

1. Full control and quick decisions — she alone decides, without consulting directors or shareholders.
2. Secrecy and all profits — business information remains private and the entire profit is hers; few legal formalities.

(b) Benefits of converting to a company:

1. Large financial resources — capital can be raised from many shareholders and from financial institutions, needed for nationwide expansion.
2. Limited liability and continuity — her personal assets are protected, and the business enjoys perpetual succession; professional managers can be appointed.

(c) Role of going nationwide: A countrywide chain needs huge capital, professional management and wider risk-bearing. A sole proprietor’s resources and managerial ability are limited and her liability is unlimited. Hence the plan to expand nationally strongly favours the joint stock company form.

(d) Legal formalities to operate as a company:

1. Promotion — identify the opportunity, feasibility studies, name approval (reservation of name), appointment of professionals.
2. Incorporation — file Memorandum of Association, Articles of Association, consent of directors, declaration of compliance, etc., with the Registrar of Companies and obtain the Certificate of Incorporation.
3. Capital subscription and commencement (for a public company) — issue prospectus, receive minimum subscription, allot shares and file declaration before commencing business. A private company can start after incorporation.

Topic checklist

• Sole proprietorship: features, merits, limitations
• Joint Hindu family business: Karta, co-parceners, features
• Partnership: types of partners and partnerships, registration, deed, mutual agency
• Cooperative society: features, merits, limitations, types
• Joint stock company: features; private vs public company
• Factors in choosing a form of business organisation

Total questions answered: 15 of 15