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

Sole proprietorship is a form of business wherein only a single person is the owner of the business. He is the only one who manages and controls the business. Thus, among the given alternatives, this form of business would be more suitable for a grocery store, medical store, craft centre and internet cafe. The reason for this is that these types of businesses would require less initial capital, limited managerial ability and minimal legal formalities. Apart from these, direct personal contact with consumers is required in all the mentioned businesses which is possible only under a sole proprietorship form of business.  

In a partnership, a trade agreement made by one owner is binding on the others. According to the Indian Partnership Act, 1932, 'A partnership is the relation between persons who have agreed to share the profits of the business carried on by all or any of them acting for all'. The definition shows that every partner is both a principal and an agent. Being an agent of other partners, he binds other partners through his actions and as a principal he is bound by the action of other partners. Moreover, the partners share the responsibility of decision making of the business.

1. For a sole proprietorship firm, the owner's personal belongings can be sold for the repayment of debts. Thus, the creditors will sell the personal assets of the sole proprietor in order to recover debts. 
2. For a partnership firm, the creditors can demand money from either Akbar or Anthony. This is so because both partners are jointly and equally liable to pay off the debt in proportion to their share in the business. However, if any of the partners becomes insolvent, then it becomes the duty of the other partner to pay the creditors. Later, the paid partner can recover his money from the other partner according to the partnership agreement. 

a. Two benefits of remaining a sole proprietor are 

1. Kiran can solely enjoy the profits of the business.

2. She is the sole decision maker and need not publish her business accounts.

b. Two benefits of converting to a joint stock company: 

1. She can collect a large amount of funds by issuing shares to the public.

2. Liability of members of company is limited to the amount of capital invested by them.

c. If she wants to go nationwide, then she will need more capital and will require efficient management. Hence, she should opt for a joint stock company. 

d. To operate her business as a company, she will have to follow certain legal formalities:

1. She has to take care of legal documentation and compile several documents before its functioning.

2. She has to obtain a certificate of incorporation and a certificate of commencement of business if she wants to open a public limited company.

3. She will have to appoint professional experts.

4. She has to prepare various documents such as a prospectus, Memorandum of Association (MOA) and Articles of Association (AOA).

Registration for a partnership firm is not necessary. However, firms still voluntarily apply for registration. This is because it is a definite proof of the firm's existence, and if a firm does not get itself registered, then it can lose out on many benefits. In addition, some serious consequences it can face because of non-registration are

• Inability to file a suit by the partner of an unregistered firm against another firm.
• Inability to file a suit against a third party for the recovery of claims. However, suits can be filed against a non-registered firm by a registered firm for their claims.
• Inability to file a suit against any of its co-partners.

Important privileges available to a private company over a public company:

• Number of members required: The number of members required for the formation of a private company is two, while it is seven for a public company.

• Number of directors required: A private firm requires at least two directors, but a public company needs a minimum of three directors.

• Commencement of business: Business can be started by a private company as soon as it receives its certificate of incorporation. A public company, on the other hand, needs a certificate of commencement for starting the business.

• Index of members: There is no compulsion to maintain the index of members for the private company. On the contrary, it is mandatory to maintain an index of members for a public company.

• Issuance of loans to directors: For a private company, loans can be issued to the directors without prior permission of the government. On the other hand, for a public company, loans can be issued to the directors only after taking the permission of the government.

A cooperative society is a voluntary association of persons who have come together and work together for the welfare of its members. This society conducts its election in a democratic manner, i.e. it follows the principle of 'one man, one vote'. Every member of the society is entitled to one vote irrespective of the capital invested by him/her or the number of shares he/she has. This prevents any kind of discrimination in the body. Also, members have the right to join or leave the society anytime without any compulsion.

Moreover, the membership of the society is open to all without any kind of discrimination on the basis of religion, caste or sex. This signifies the secular nature of a cooperative society.

A person who by his initiative, words, conduct or behaviour gives others an impression that he is a partner of the firm is known as 'partner by estoppel'. Such partners do not contribute any capital and do not participate in management activities. They are also not entitled to any kind of profits or losses incurred by the company. However, they can be held liable to any loans, debts or credits by the third party as they are considered partners by them. In these kinds of cases, assets of such partners can be used to clear debts. 

1. Perpetual succession: This is one of the features of a Joint Stock Company. It means that a company has a separate legal entity and is not influenced by the death, insolvency or retirement of its members. A company is created by law; thus, it can only be ended by law. The company ceases to exist only when the procedure of its closing called 'winding up' is completed.
2. Common seal: It is an official signature of the company. Because a company is an artificial entity, it acts through its Board of Directors and other officials. The document through which the company gets into an agreement needs to have a common seal; otherwise, it would not be legally binding on the company.
3. Karta: Karta, apart from being the senior-most member of the family, is also the head of the Hindu Undivided Family. He has the absolute decision-making authority over the business which gives him unlimited liability. It is only the karta who has the right to enter into a legal contract with others.
4. Artificial person: This term is used to refer to the company. This is because though it has its legal identity-rights, liabilities and functions, it is not a human being.  Also, it is a person existing in the eyes of the law but is dependent on the Board of Directors and other members to get its work done.

A sole proprietorship firm is a form of business wherein a single individual owns, manages and controls the business. Thus, he bears all the losses alone and he is not entitled to share his profits with anyone else.

Merits of a sole proprietorship firm:

1. Fast decision making: The complete control of the business is in the hands of the sole proprietor. Thus, decisions are made instantly without wasting any time. Hence, a proprietor can capitalise market opportunities quickly. 
2. Confidentiality: The sole proprietor is not legally obligated to publish his records or accounts as he is the single decision-making authority. Hence, all business information can be kept confidential and secret. 
3. Formation and closure: Because there are no specific laws governing the sole proprietorship firm, no/minimal legal formalities are required in the formation or closure of this business. Thus, the whole process becomes effortless.
4. Incentive: The sole proprietor bears all the risks and losses of the business alone, enables him to directly get all the benefits of his efforts he has put in the business. 

Limitations of a sole proprietorship firm:

1. Limited resources: A sole proprietor is the single owner of the business; thus, he has limited resources such as his personal assets, wealth and borrowings to be invested in the business. Also, he faces problems in getting loans from banks.  This leads to a hindrance in the growth of the organisation. 
2. Unlimited liability: The business is dependent on the owner; thus, he has unlimited liability. If creditors are unable to recover their dues from business assets, then they have the right to recover the same from the personal assets of the proprietor. 
3. Limited managerial ability: The sole proprietor is responsible for all the tasks of the business which include buying, selling, financing and planning. However, a single person cannot be best in all areas. Also, because he has limited resources, he cannot hire experts. 
4. Limited life of business: According to law, there is no distinction between the firm and the owner. Thus, factors such as death, insolvency and illness can lead to a closure of the business.

A partnership form of business is considered by some to be a relatively unpopular form of business ownership because of its limitations which are

1. Unlimited liability: All the partners have unlimited liability. This implies that if business assets are insufficient to pay business debts, then the personal assets of partners can be used to do so.
2. Limited resource: The number of partners who can be added to this form is restricted; hence, the capital investment brought in is low. This possesses a restriction to the firm in terms of expansion beyond a certain point.
3. Conflicts: All the partners share the authority of decision-making equally in a firm. Thus, owing to their different backgrounds, there are chances that they may have different opinions on various subjects. This may lead to a difference of opinions and conflicts among them which may result in the downfall of the business.
4. Lack of continuity: There is a lack of continuity in this form as the partnership agreement comes to an end with the death, retirement, bankruptcy and mental illness of any one of the partners. However, if the rest of the partners want to continue with the business, they need to create a new agreement.

Although a partnership has its limitations, it also has some merits which are

1. Easy formation and closure: Formation of this form is very easy as there is a requirement of only an agreement between the two prospective partners. Also, it is not mandatory to register the firm. This helps in closing of the business easily.
2. Effective decision making: It has members with a variety of expertise which are used in the decision making process. As all the decisions are taken by the partners together, it results in effective decision making as compared to other forms of business.
3. Risk sharing: Risks are shared among partners equally, thereby motivating more risk taking to earn more profit. This also helps reduce concern and distress.
4. Confidentiality: Because a partnership is not entitled to publish its records and accounts, it can maintain business confidentiality and secrecy.

It is very important to choose an appropriate form of organisation because there exists a variety of business organisations and each form of business has its own advantages and disadvantages. In addition, the form of business organisation cannot be changed easily. Thus, due care should be taken to select the correct form of organisation.

Factors determining the choice of form of organisation:

1. Nature of business: The type of business one wants to do is the most important factor in determining the form of business. If one wants to have a direct personal contact with customers, then a sole proprietorship would be the best form. If one is willing to set up a large manufacturing unit, then a company form of business would be preferred. However, for providing professional services, a partnership form of business would be chosen.
2. Cost and ease in setting up a business: The most inexpensive way of starting a business is sole proprietorship. It has minimal legal formalities. For a partnership, the cost of setting up is low along with less legal formalities due to limited scale of operations. However, forming a company is an expensive and lengthy process.
3. Degree of control: If one is interested in having the decision-making power in his/her hands, then a sole proprietorship would be preferred. However, if the owners are interested in sharing control for effective decision making, then they would go for a partnership form of business. In a company form of business, owners have to hire professional experts to manage the affairs of the company. Here, the management is completely separate from the ownership.
4. Continuity: In sole proprietorship, the continuity depends on the people and the events which take place such as death and insolvency. However, the mentioned factors do not affect the continuity of the other forms of business.
5. Capital consideration: It is one of the important factors which help in determining the choice of the organisation. A sole proprietorship form of business requires minimum investment/capital. However, if one has adequate funds, then he can opt for a partnership form of business. However, huge financial resources are required for the company.

The Indian Cooperative Societies Act, 1912, defines a cooperative organisation 'as a society which has its objectives for the promotion of economic interests of its members in accordance with the cooperative principles'. In simpler words, it is an organisation wherein people voluntarily form an association for mutual help.

Characteristics:

1. Voluntary association: Anyone having a similar/common interest is allowed to join this association irrespective of their religion, caste or gender. A person can join the society according to his requirement and may leave it in the same manner.
2. Legal status: Registration is compulsory for the society, thereby giving it a status of separate legal identity. It can enter contracts and has the right to sue others or can be sued by others.
3. Limited liability: The liability of the members is limited to the amount of capital invested by them.
4. Democratic and secular control: It follows the principle of 'one man, one vote', thereby maintaining equality among its members. Also, the members of a particular religion cannot dominate the affairs of the society.

Merits:  

1. Ease of formation: It can be formed by at least ten adult persons having common/similar interests. It can easily be registered with minimal legal formalities.
2. Limited liability: The liability is restricted to the amount of capital contributed by the members in the society. Personal assets cannot be used to repay business debts.
3. Stable existence: The continuity of the society is not affected by death, insolvency and mental illness of its members as it is a separate legal identity.
4. Government support: The cooperative society epitomises the idea of democracy. Thus, it finds support from the government in the form of low tax rate, subsidies and low interest rates on loans. 

Demerits:

1. Limited resources: A cooperative society has limited resources as capital is contributed by people who have limited funds.
2. Inefficient management: The society is managed by its members who are not professional experts with technical knowledge. Also, inability to pay higher salaries prevents the members from recruiting experts.
3. Government control: As these societies receive support from the government, they have to follow certain government rules and regulations related to auditing of accounts, submission of accounts and so forth.
4. Differences of opinion: In the society, disputes and conflicts among members take place because they belong to different sections of society and sometimes they have a difference of opinion.

Types of Cooperative Societies:

1. Consumer Cooperative Societies protect the interest of consumers by eliminating middlemen. These societies purchase the product in bulk from wholesalers and sell directly to members at reasonable rates.
2. Producers Cooperative Societies procure raw materials and other inputs at low costs and supply them to small producers. These are established to protect the interest of small producers.  
3. Marketing Cooperative Societies help small producers who find it difficult to sell their products at profitable prices. Thus, they collect the output of producers and sell them at the best price possible. This helps in improving the bargaining power and competitive position of their members.  
4. Farmers Cooperative Societies are formed by small farmers to take advantage of large-scale mechanised farming. They help in providing better and advanced facilities to farmers at low prices.
5. Credit Cooperative Societies help farmers who cannot arrange for loans or credit. These societies provide financial help to their members. They protect members from the exploitation of lenders charging a higher rate of interest. 
6. Cooperative Housing Societies provide residential accommodation to their members. They help people to construct houses at reasonable rates.  

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

1. Fast decision making: The complete control of the business is in the hands of a sole proprietor. Thus, decisions are made instantly without wasting any time. Hence, a proprietor can capitalise market opportunities quickly. 
2. Confidentiality: The sole proprietor is not legally obligated to publish his records or accounts as he is the single decision making authority. Hence, all the business information can be kept confidential and secret. 
3. Formation and closure: Because there are no specific laws governing the sole proprietorship firm, no/minimal legal formalities are required in the formation or closure of this business. Thus, the whole process becomes effortless.
4. Incentive: The sole proprietor bears all the risks and losses of the business alone; this enables him to directly get all the benefits of his efforts he has put in the business. 
5. Sense of accomplishment: A sole proprietor gets personal satisfaction as he/she is working for himself/herself. The thought of being successful in the business brings a sense of accomplishment and self-confidence along with satisfaction.