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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.

Partners act independently

B.

Each partner is both an agent and a principal

C.

Partners have no liability

D.

Partners cannot bind the firm
Correct Answer: B

Solution:

Mutual agency implies that every partner is both an agent and a principal. He is an agent of other partners as he represents them and thereby binds them through his acts. He is a principal as he too can be bound by the acts of other partners.

Chapter Concept:

Partnership

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.

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.

Ease of formation

B.

Limited liability

C.

Direct control by owners

D.

No regulatory requirements
Correct Answer: B

Solution:

One of the main advantages of a joint stock company is limited liability, where shareholders are only liable to the extent of their share capital.

Chapter Concept:

Joint Stock Company

A.

Increased personal liability for owners

B.

Simplified decision-making process

C.

Ability to raise large amounts of capital through shares

D.

Reduced regulatory requirements
Correct Answer: C

Solution:

Transitioning to a joint stock company allows the business to raise large amounts of capital by issuing shares to the public, facilitating expansion.

Chapter Concept:

Choice of Business Organisation

A.

Maximizing profits for shareholders

B.

Providing personalized services to customers

C.

Mutual help and welfare of members

D.

Expanding market share and increasing sales
Correct Answer: C

Solution:

The primary motive of a cooperative society is mutual help and welfare of its members, which sets it apart from other profit-driven business organizations.

Chapter Concept:

Cooperative Society

A.

Unlimited liability

B.

Complexity in formation

C.

Lack of continuity

D.

Limited access to capital
Correct Answer: B

Solution:

A joint stock company faces complexity in formation due to the extensive legal requirements and procedures involved.

Chapter Concept:

Joint Stock Company

A.

Limited liability

B.

Ease of formation

C.

Unlimited liability

D.

Professional management
Correct Answer: C

Solution:

Sole proprietorships have unlimited liability, meaning the owner's personal assets can be used to pay business debts.

Chapter Concept:

Forms of Business Organisation

A.

Unlimited liability

B.

Perpetual succession

C.

Direct control by owners

D.

Limited resources
Correct Answer: B

Solution:

A Joint Stock Company is characterized by perpetual succession, meaning it continues to exist despite changes in membership, unlike a sole proprietorship which may cease upon the owner's death.

Chapter Concept:

Joint Stock Company

A.

It requires a minimum of three partners.

B.

It is formed through a legal agreement to share profits and losses.

C.

It is governed by the Companies Act, 2013.

D.

It limits the liability of partners to their capital contribution.
Correct Answer: B

Solution:

The Indian Partnership Act, 1932 defines partnership as a relation between persons who have agreed to share the profit of the business carried on by all or any one of them acting for all.

Chapter Concept:

Partnership

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Forms of Business Organisation

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True or False

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

Correct Answer: True

Solution:

A Joint Stock Company is defined as an artificial person created by law, having a distinct legal identity from its members, perpetual succession, and limited liability, as governed by the Companies Act.

Chapter Concept :

Joint Stock Company

Correct Answer: True

Solution:

In a Joint Hindu Family Business, the Karta has unlimited liability, while the liability of other members is limited to their share of the co-parcenery property.

Chapter Concept :

Joint Hindu Family Business

Correct Answer: False

Solution:

A sole proprietorship is characterized by unlimited liability, meaning the owner is personally responsible for all debts of the business.

Chapter Concept :

Choice of Business Organisation

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 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: 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: True

Solution:

A partnership deed is indeed a legal document that specifies the terms and conditions governing the partnership, including the rights, responsibilities, and profit-sharing ratios among the partners.

Chapter Concept :

Partnership Deed

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: True

Solution:

Producer's cooperative societies aim to protect small producers by providing inputs for production and purchasing their output, as described in the excerpt.

Chapter Concept :

Types of Cooperative Societies

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