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Forms of Business Organisation

Forms of Business Organisation

Action PlanNotesQuestionsMock-Test
Study Action Plan (Sorted by Difficulty)
Partnership Deed
Accuracy: 58%
Total Attempted52
Total Correct30
Total Incorrect22
Difficulty Level:
Medium
Choice of Business Organisation
Accuracy: 60%
Total Attempted75
Total Correct45
Total Incorrect30
Difficulty Level:
Medium
Types of Cooperative Societies
Accuracy: 61%
Total Attempted57
Total Correct35
Total Incorrect22
Difficulty Level:
Medium
Joint Stock Company
Accuracy: 63%
Total Attempted138
Total Correct87
Total Incorrect51
Difficulty Level:
Medium
Partnership
Accuracy: 64%
Total Attempted72
Total Correct46
Total Incorrect26
Difficulty Level:
Medium
Private vs Public Company
Accuracy: 66%
Total Attempted64
Total Correct42
Total Incorrect22
Difficulty Level:
Medium
Forms of Business Organisation
Accuracy: 67%
Total Attempted103
Total Correct69
Total Incorrect34
Difficulty Level:
Medium
Cooperative Society
Accuracy: 85%
Total Attempted47
Total Correct40
Total Incorrect7
Difficulty Level:
Low
Sole Proprietorship
Accuracy: 90%
Total Attempted58
Total Correct52
Total Incorrect6
Difficulty Level:
Low
Joint Hindu Family Business
Accuracy: 92%
Total Attempted48
Total Correct44
Total Incorrect4
Difficulty Level:
Low

Learning Objectives

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Learning Objectives

After studying this chapter, you should be able to:
  • Identify different forms of business organisation.
  • Explain features, merits and limitations of different forms of business organisations.
  • Distinguish between various forms of organisations.
  • Discuss the factors determining choice of an appropriate form of business organisation.

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Revision Notes & Summary

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Chapter 2: Forms of Business Organisation

Learning Objectives

  • Identify different forms of business organisation.
  • Explain features, merits, and limitations of different forms of business organisations.
  • Distinguish between various forms of organisations.
  • Discuss the factors determining the choice of an appropriate form of business organisation.

Types of Companies

Private Company

  • Definition: A company that restricts the transfer of shares and does not invite the public to subscribe to its securities.
  • Characteristics:
    • Minimum of 2 and a maximum of 200 members.
    • Must use 'private limited' after its name.
    • Cannot invite the public to subscribe to its shares.

Public Company

  • Definition: A company that can invite the public to subscribe to its securities.
  • Characteristics:
    • Minimum of 7 members with no maximum limit.
    • Must have at least 3 directors.
    • Shares can be freely transferred.

Merits of Company Form of Organisation

  1. Limited Liability: Shareholders are liable only to the extent of their unpaid shares.
  2. Transfer of Interest: Shares can be easily transferred, enhancing liquidity.
  3. Perpetual Existence: The company continues to exist regardless of changes in membership.
  4. Scope for Expansion: Ability to raise capital from the public and financial institutions.
  5. Professional Management: Can hire specialists and experts for efficient management.

Limitations of Company Form of Organisation

  1. Complexity in Formation: Involves extensive documentation and legal compliance.
  2. Lack of Secrecy: Required to disclose financial information publicly.
  3. Impersonal Work Environment: Less personal interaction among employees.
  4. Numerous Regulations: Subject to strict regulatory oversight.
  5. Delay in Decision Making: Due to multiple layers of management.
  6. Conflict of Interests: Diverse stakeholder interests can lead to conflicts.

Factors Determining Choice of Business Organisation

  • Initial Costs: The cost of setting up the business.
  • Liability: The extent of personal liability for debts.
  • Continuity: The ability of the business to continue operating.
  • Capital Considerations: Availability of funds for investment.
  • Managerial Ability: Skills and expertise of the management team.
  • Degree of Control: The level of control owners wish to maintain.
  • Nature of Business: The type of business activities being undertaken.

Types of Partners in a Partnership

Type of PartnerCapital ContributionManagement ParticipationShare in Profits/LossesLiability
Active PartnerContributes capitalParticipates in managementShares profits/lossesUnlimited liability
Sleeping/Dormant PartnerContributes capitalDoes not participate in managementShares profits/lossesUnlimited liability
Secret PartnerContributes capitalParticipates secretly in managementShares profits/lossesUnlimited liability
Nominal PartnerDoes not contribute capitalDoes not participate in managementGenerally does not share profits/lossesUnlimited liability
Partner by EstoppelDoes not contribute capitalDoes not participate in managementDoes not share profits/lossesUnlimited liability

Key Terms

  • Sole Proprietorship: A business owned and operated by a single individual.
  • Partnership: A business owned by two or more individuals who share profits and liabilities.
  • Cooperative Society: An organization owned and operated by a group of individuals for their mutual benefit.
  • Artificial Person: A legal entity created by law that can own property, incur debts, and enter contracts.
  • Perpetual Succession: The continuation of a company’s existence despite changes in ownership or membership.
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Practice Test – MCQs, True/False

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Multiple Choice Questions

A.

Shareholders

B.

Board of Directors

C.

Government regulators

D.

External auditors
Correct Answer: B

Solution:

The Board of Directors is responsible for the management and control of a Joint Stock Company's affairs, as they are elected by the shareholders to oversee the company's operations.

Chapter Concept:

Joint Stock Company

A.

Cost and ease of setting up

B.

Liability

C.

Personal hobbies

D.

Continuity
Correct Answer: C

Solution:

Personal hobbies are not a factor in choosing a business organization. Important factors include cost, liability, and continuity.

Chapter Concept:

Choice of Business Organisation

A.

The business automatically dissolves upon the death of the Karta.

B.

The business continues as the next eldest member becomes the Karta, ensuring stability.

C.

The business is sold to external investors upon the death of the Karta.

D.

The business requires a new agreement to continue after the Karta's death.
Correct Answer: B

Solution:

One of the key advantages of a Joint Hindu Family Business is its continuity. The business does not dissolve upon the death of the Karta; instead, the next eldest member assumes the role of Karta, ensuring the business continues without interruption.

Chapter Concept:

Joint Hindu Family Business

A.

It allows them to participate in management decisions.

B.

It limits their financial risk to the amount invested in shares.

C.

It enables them to transfer shares without restrictions.

D.

It provides them with tax exemptions.
Correct Answer: B

Solution:

Limited liability means that shareholders' financial risk is restricted to the amount they have invested in shares, protecting their personal assets from company debts.

Chapter Concept:

Joint Stock Company

A.

A person who actively participates in the management of the firm without being a formal partner.

B.

A person who allows their name to be used by the firm, leading others to believe they are a partner.

C.

A partner who has retired but still holds shares in the firm.

D.

A new partner who is yet to sign the partnership deed.
Correct Answer: B

Solution:

A 'Partner by Estoppel' is someone who, through their behavior or representation, allows others to believe they are a partner in the firm, making them liable for the firm's debts as if they were a partner.

Chapter Concept:

Partnership Deed

A.

It can have a maximum of 200 members.

B.

It can invite the public to subscribe to its shares.

C.

It must have a minimum of three directors.

D.

It is required to maintain an index of members.
Correct Answer: A

Solution:

A private company can have a maximum of 200 members, excluding present and past employees.

Chapter Concept:

Private vs Public Company

A.

Limited liability of members

B.

Support from government

C.

Inefficiency in management due to lack of professional managers

D.

Stable existence despite changes in membership
Correct Answer: C

Solution:

Cooperative societies often face inefficiency in management because they cannot afford to hire professional managers due to limited resources.

Chapter Concept:

Cooperative Society

A.

A private company restricts the transfer of shares, while a public company allows free transferability.

B.

Both private and public companies restrict the transfer of shares.

C.

A public company restricts the transfer of shares, while a private company allows free transferability.

D.

Neither private nor public companies allow share transferability.
Correct Answer: A

Solution:

A private company restricts the transfer of its shares to maintain control, whereas a public company allows free transferability of shares.

Chapter Concept:

Private vs Public Company

A.

Sole proprietorship

B.

Joint Hindu family business

C.

Cooperative society

D.

Joint stock company
Correct Answer: A

Solution:

Sole proprietorship is characterized by unlimited liability and is most suitable for small businesses, especially in their initial years of operation.

Chapter Concept:

Forms of Business Organisation

A.

It is required by law to form a partnership.

B.

It serves as evidence of the terms agreed upon by the partners.

C.

It guarantees profit for all partners.

D.

It limits the liability of the partners.
Correct Answer: B

Solution:

A written partnership deed serves as evidence of the conditions agreed upon by the partners, reducing misunderstandings.

Chapter Concept:

Partnership Deed

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Forms of Business Organisation

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True or False

Correct Answer: True

Solution:

Consumer cooperative societies aim to eliminate middlemen to achieve economy in operations and provide good quality products at reasonable prices to their members.

Chapter Concept :

Types of Cooperative Societies

Correct Answer: True

Solution:

A cooperative society is indeed a voluntary association of individuals who come together to promote their common economic interests, focusing on mutual help and welfare, as governed by the Cooperative Societies Act.

Chapter Concept :

Cooperative Society

Correct Answer: False

Solution:

A partnership deed is not mandatory but is advisable to have a written agreement as it constitutes evidence of the conditions agreed upon.

Chapter Concept :

Partnership Deed

Correct Answer: True

Solution:

A sole proprietorship is indeed a business form where a single individual owns, manages, and controls the business, bearing all risks and enjoying all profits.

Chapter Concept :

Sole Proprietorship

Correct Answer: False

Solution:

A private company can have a minimum of 2 and a maximum of 200 members, excluding the present and past employees.

Chapter Concept :

Private vs Public Company

Correct Answer: True

Solution:

The cooperative society must be registered under the Cooperative Societies Act 1912 to gain a separate legal identity, allowing it to enter into contracts, hold property, and sue or be sued.

Chapter Concept :

Cooperative Society

Correct Answer: False

Solution:

In a partnership, the partners have unlimited liability. This means that personal assets may be used for repaying debts if the business assets are insufficient.

Chapter Concept :

Partnership

Correct Answer: False

Solution:

In a partnership, the liability of partners is unlimited. Personal assets may be used for repaying debts in case the business assets are insufficient.

Chapter Concept :

Partnership

Correct Answer: False

Solution:

In a sole proprietorship, the owner has unlimited liability, meaning personal assets can be used to pay off business debts.

Chapter Concept :

Forms of Business Organisation

Correct Answer: True

Solution:

A joint stock company is indeed an artificial person, as it is created by law and has a separate legal identity from its members.

Chapter Concept :

Joint Stock Company

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