Chapter 2 Forms of Business Organisations Solutions
Question - 11 : - Distinguish between a Joint Hindu family business and partnership.
Answer - 11 : -
| Difference between Joint Hindu family business and Partnership |
| Basis of difference | Joint Hindu Family Business | Partnership |
| Governance | Governed by the Hindu law. | Governed by Partnership Act, 1932. |
| Liability | The head has unlimited liability, while the liabilities of other members are limited to the extent of their share in the business. | All the partners have unlimited liability. |
| Decision making and control | The karta is responsible for the management and control of the business. | All the partners jointly manage and control the firm. |
| Number of members | Minimum: 2 Maximum: No limit | Minimum: 2 Maximum: 10 for the banking business and 20 for other businesses |
| Minor | Minors can be members. | Minors cannot be members. |
Question - 12 : - Despite limitations of size and resources, many people continue to prefer sole proprietorship over other forms of organisation? Why?
Answer - 12 : -
Despite the limitations in terms of size and resources, many people prefer sole proprietorship over any other forms of business primarily because of the numerous benefits associated with the sole proprietorship business form.
The following are a few important benefits that a businessperson enjoys by being a sole proprietor.
(a) Ease in formation and closure: There are hardly any legal formalities that are required to be fulfilled for setting up a sole proprietorship firm. However, if a proprietor wants to deal in drugs and liquor, then he or she must to acquire a licence. Just as setting up a sole proprietorship firm is easy, its closure is also hassle-free.
(b) Quick decision making: A sole proprietor enjoys complete control over the business, facilitating quick and easy decision making.
(c) Direct incentive: A sole proprietor is the sole bearer of all types of risks associated with the business and at the same time is the single recipient of all the profits and gains earned from the business. Thus, it is due to this direct link between the businessperson’s efforts and the rewards which keeps this individual motivated to operate the business efficiency and effectively.
(d) Flexibility in operations: A sole proprietorship firm is highly flexible in operations. It can adapt itself to various situations, and vital changes can be incorporated, as per the dynamism of the business environment. The reason for the high degree of flexibility can be attributed to the fact that a sole proprietor is the only person who is involved in every aspect of the business.
Question - 13 : - In which form of organisation is a trade agreement made by one owner binding on the others? Give reasons to support your answer.
Answer - 13 : -
It is under partnership that the trade agreement made by one owner becomes binding for others. This is because every partner acts for each other. In other words, every partner is both a principle as well as an agent. As an agent he binds others through his actions and as a principle he is bind by the action of others.
Question - 14 : - The business assets of an organisation 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 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 - 14 : -
(a) In case of a sole proprietorship the creditors can claim the personal property of the proprietor. This is because the proprietor has unlimited liability.
(b) The creditors can approach either Akbar or Anthony. Both of them would have the liability to pay according to their profit sharing ratio. Moreover, in case one of them becomes insolvent the creditors can approach the other partner.
Question - 15 : - 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 - 15 : -
(a) The following are two of the benefits of sole proprietorship.
i. A sole proprietor is the single recipient of all the profits of the business.
ii. A sole proprietor takes all business decisions independently and enjoys complete control over the business.
(b) The following are two benefits of converting to a joint stock company.
i. In a joint stock company capital can be easily expanded by issuing fresh, new shares.
ii. The liability of the owners is limited to the amount of capital invested by them.
(c) If she plans to go nationwide then converting to a joint stock company would be more appropriate as it will lead to large scale business operations.
(d) Some of the legal formalities to be completed for operating a joint stock company are as follows.
i. Promotion of the company
ii. Submitting documents such as Memorandum of Association, Articles of Association, statutory declaration and agreement
iii. Getting the certificate of incorporation
iv. Getting the certificate of commencement of business