Forms of Business Organisation
Short Answer Type
Question 1: For which of the following types of business do you think a sole proprietorship form of organisation would be more suitable, and why?
Grocery store, Medical store, Legal consultancy, Craft centre, Internet café , Chartered accountancy firm.
Answer: A sole proprietorship would be more suitable for grocery store, medical store and internet café. Some of the reasons are as follows. These are the activities in which a personalized service is expected by the consumer. Moreover, managing these businesses does not require professional expertise and these businesses can be started with a small amount of capital and needs no legal formality.
Question 2: For which of the following types of business do you think a partnership form of organisation would be more suitable, and why? Grocery store, Medical clinic, Legal consultancy, Craft centre, Internet café , Chartered accountancy firm
Answer: A partnership firm would be suitable for medical clinic, legal consultancy and chartered accountancy firm. In all these cases, there are numerous examples of proprietorship firms however, for better access to capital and professional knowhow, partnership would be more suitable. Moreover, by going for partnership the business can attract a larger number of equally skilled professionals for the related services being offered.
Question 3: Explain the following terms in brief
Answer: A company shows the example of perpetual succession. A company is created by law and can cease to exist only by law. Thus, even if members continue to be changed; the company virtually has endless lifespan. There is no issue related to succession in a company.
Answer: A company’s decision is endorsed by the common seal. The common seal is therefore, the legal identity of the company. Any decision which does not have company seal is not considered a valid decision. Any document without the company seal would be considered as useless piece of paper.
Answer: The eldest member of the Hindu Undivided Family (HUF) is called the karta. A karta is the main owner of the HUF business and he is the major decision maker. His decision shall be binding on all other members. A karta has unlimited liability and his personal assets would be utilized in case a need comes to pay the debt of the business entity.
Answer: A company is considered as an artificial person. It exists as a business entity and can hold property, can sue and can be sued the way a real person does. The only difference with the real person is that the artificial person cannot breathe or eat.
Question 4: Compare the status of a minor in a Joint Hindu Family Business with that in a partnership firm.
Answer: Since partnership in an HUF is based on birth, so a minor can be included in the HUF business. But since a minor cannot enter into a legal agreement, he cannot become a member of a partnership firm. However, a minor can be admitted to the benefits of a partnership firm with consent of all other members. In that case, his liability will be limited to his contribution in capital. He cannot take active part in the business. He can share the benefits but cannot be asked to bear the losses. If a minor partner wishes he can inspect the accounts of the firm. Once a minor turns into a major, it is up to his decision whether he wants to continue as a partner or not.
Question 5: If registration is optional, why do partnership firms willingly go through this legal formality and get themselves registered? Explain.
Answer: If a partnership firm is not registered, it is deprived of many benefits. The consequences of non-registration of a firm are as follows:
- A partner of a non-registered firm cannot file a suit against the firm or other partners.
- The firm cannot file a suit against third parties.
- The firm cannot file a suit against the partners.
Hence, in spite of registration being optional, partnership firms willingly go through this legal formality so that the firm can get various benefits accorded to a registered firm.
Question 6: State the important privileges available to a private company.
Answer: Some of the privileges of a private company as against a public company are as follows:
- Only two members are needed to form a private company, while at least seven members are needed to form a public company.
- Since public is not invited to subscribe to the shares of the company, so there is no need to issue a prospectus.
- Allotment of shares can be done without receiving the minimum subscription.
- A private company can commence its business as soon as it gets the certificate of incorporation. A public company, on the other hand, has to wait for a certificate of commencement before it can start the business.
- A private company needs to have just two directors, while a public company needs to have at least three directors.
- A private company is not required to maintain an index of its members.
- In a private company, there is no restriction on the amount of loan to directors. But in a public company, loan to directors needs an approval from the government.
Question 7: How does a cooperative society exemplify democracy and secularism? Explain.
Answer: A cooperative society works on the principle of one man one vote and thus it exemplifies democracy. Membership to a cooperative society is open to all and no discrimination can be done on the basis of caste or religion. Hence, it exemplifies secularism.
Question 8: What is meant by ‘partner by estoppel’? Explain.
Answer: A person is considered a partner by estoppel if by his conduct/behavior, initiative/action he gives an impression that he is the partner of the firm. A partner by estoppel is held liable for the debt by third party because he is considered as a partner in the eye of the third party. Let us assume a person who helps his close friend in managing the business. Although he has not contributed capital and has not signed the partnership deed, he takes active part in negotiations on behalf of the firm. Such a person would be considered as a partner by estoppel.