Multiple choice questions : Solutions of Questions on Page Number : 51
Q1 :The structure in which there is separation of ownership and management is called
(a) Sole proprietorship
(b) Partnership
(c) Company
(d) All business organisations
Answer :
The organisational structure in which there is separation of ownership and management is called a company. In a company, management and ownership lie in the hands of different individuals. A company is owned by its shareholders, while its management is handled by a group of elected persons known as the board of directors. The board of directors in turn appoints the top officials for managing the day-to-day operations of the business.
Hence, the correct answer is option (c).
Q2 :The karta in Joint Hindu family business has
(a) Limited liability
(b) Unlimited liability
(c) No liability for debts
(d) Joint liability
Answer :
The karta is the eldest male member of a Joint Hindu family who is responsible for decision making in the family business. He needs no permission from the coparceners (joint heirs) before taking any action. Since the karta has complete control over the business, his liability is unlimited. On the other hand, the liability of all coparceners is limited to their share in the family business.
Hence, the correct answer is option (b).
Q3 :In a cooperative society the principle followed is
(a) One share one vote
(b) One man one vote
(c) No vote
(d) Multiple votes
Answer :
When individuals voluntarily join together to protect and promote their common interests, they form a cooperative society. A cooperative society is managed by an elected body known as the managing committee. The elections in cooperative societies are based on the principle of ‘one man, one vote’. This principle guarantees equal voting rights to the members of a society, thereby preventing any discrimination in the body.
Hence, the correct answer is option (b).
Q4 :The board of directors of a joint stock company is elected by
(a) General public
(b) Government bodies
(c) Shareholders
(d) Employees
Answer :
A joint stock company is owned by individuals known as shareholders. The shareholders elect the board of directors as the chief managing body of the company and grant it indirect control over the business. The board of directors in turn appoints the top officials for managing the business operations.
Hence, the correct answer is option (c).
Q5 :The maximum number of partners allowed in the banking business are
(a) Twenty
(b) Ten
(c) No limit
(d) Two
Answer :
In the case of the banking business, the maximum number of partners allowed is 10. In other businesses, the maximum number of partners allowed is 20.
Hence, the correct answer is option (b).
Q6 :Profits do not have to be shared. This statement refers to
(a) Partnership
(b) Joint Hindu family business
(c) Sole proprietorship
(d) Company
Answer :
Profits do not have to be shared in a sole proprietorship form of business. This is because, in a sole proprietorship, the business is owned, managed and controlled by a single individual known as the sole proprietor. Thus, being the sole owner of the business, he or she becomes the single recipient of all the profits of the business.
Hence, the correct answer is option (c).
Short answersmultiple choice questions : Solutions of Questions on Page Number : 52
Q1 :For which of the following types of business do you think a sole proprietorship form of organisation would be more suitable, and why?
(a) Grocery store
(b) Medical store
(c) Legal consultancy
(d) Craft centre
(e) Internet cafe
(f) Chartered accountancy firm
Answer :
A sole proprietorship refers to a form of business organisation in which an individual is the sole owner of the business. All operations, management and activities of the business are handled by this individual. Thus, it is a favourable form of organisation for small businesses. Among the given alternatives, the sole proprietorship form of organisation is more suitable for the following businesses.
(a) Grocery store
(b) Medical store
(c) Craft centre
(d) Internet cafe
This is because these businesses require a lower capital and lesser managerial ability to handle the day-to-day operations. The sole proprietor has all the rights to make decisions and carry out plans as per his or her own will. Hence, the sole proprietorship form of business is more suitable for the four business types mentioned above.
Q2 :For which of the following types of business do you think a partnership form of organisation would be more suitable, and why?
(a) Grocery store
(b) Medical store
(c) Legal consultancy
(d) Craft centre
(e) Internet cafe
(f) Chartered accountancy firm
Answer :
We know that in a partnership form of organisation, there are two or more persons who work together, pool their respective funds and finally share the profits earned (or bear the losses incurred). Among the given alternatives, a partnership is highly suitable for the following types of businesses.
(a) Legal consultancy
(b) Chartered accountancy firm
The reason is that a legal consultancy and a chartered accountancy firm require high managerial ability to handle the diverse activities and the comparatively wide range of operations. Besides, these businesses require balanced decision making and risk-taking in order to earn the maximum possible gains. Hence, a partnership is the most suitable form of business for the two businesses mentioned above.
Q3 :Explain the following terms in brief
(a) Perpetual succession
(b) Common seal
(c) Karta
(d) Artificial person
Answer :
(a) Perpetual succession: It implies that a company will continue to exist until and unless it is forced by the law to wind up. This implies that a company, as a separate legal entity, cannot come to an end by itself and will continue to operate forever. It will not cease to exist even in situations such as death, retirement or insolvency of any of its members-that is, a company will continue to operate even if all its members die.
(b) Common seal: A company is an artificial entity that is created under the law. Unlike human beings, it cannot sign official documents. This is where the role of a common seal becomes important. A common seal is the official signature of a company that is used by its board of directors in almost all the important official documents. The presence of this seal authenticates the documents, and documents with a common seal can be provided as evidence in a court of law.
(c) Karta: The term karta is used for the head of a joint Hindu family who runs a family business. The karta of a Joint Hindu family is responsible for carrying out the business operations of the family business and exercising full control over the business. He is the eldest member of the family and has unlimited liabilities along with absolute decision-making powers.
(d) Artificial person: By the term artificial person, we mean that a company is created as a separate legal entity under the law and is a juristic person. However, unlike human beings, a company, as an artificial person, cannot breathe or talk, cannot sign its documents and cannot negotiate with its customers. In contrast, like human beings, a company does have its own life that is truly independent of the life of its members. Hence, because of these dissimilarities and similarities, a company is regarded as an artificial person.
Q4 :Compare the status of a minor in a Joint Hindu Family Business with that in a partnership firm.
Answer :
As per the Indian law, any person below the age of 18 years is considered a ‘minor’. The status of a minor in a Joint Hindu Family differs from that in a partnership firm. In case of a Joint Hindu Family, membership in the family business is by birth. This means that as soon as a boy child is born in a Joint Hindu Family, he is automatically entitled to a share in his family business. In this case, the minor enjoys an equal ownership right over the inherited property as the other members of the family. However, his liability is limited only to the extent of his share in the joint property.
As per the Partnership Act, 1923, no minor can be a partner in a partnership firm. But a partnership firm, with the consent of all the partners, can admit a minor to share the profits of the firm; but he cannot be asked to either contribute capital or bear the losses incurred by the business. A minor is not legally competent to enter into any legal contracts, and therefore, he or she cannot be considered a partner. However, a minor, after attaining the age of 18 years, has the option of either continuing with the partnership firm or withdrawing his interest from it.
Q5 :If registration is optional, why do partnership firms willingly go through this legal formality and get themselves registered? Explain.
Answer :
Although registration in case of a partnership firm is optional yet many firms voluntarily opt for it. This is because of the various legal disadvantages associated with non-registration. A few of these disadvantages are listed below.
(a) The partners of a non-registered firm cannot file a suit against a third party; however, non-registration of a partnership firm does not prevent other firms from suing it .
(b) The firm cannot file a case against any of its partners. Similarly, a partner of a non-registered firm cannot file a case against his or her co-partners or the firm.
(c) A non-registered partnership firm cannot enforce its claims against a third party in a court.
Q6 :State the important privileges available to a private company.
Answer :
A private company enjoys certain exemptions or privileges which are often not available to a public company. Some of the privileges enjoyed by a private company are given below.
(a) Lesser number of members required: A private company requires only two members for formation, while a public company requires at least seven members.
(b) Commencement of business: A private company can start its business operations right from the day of receiving the certificate of incorporation. On the other hand, it is mandatory for a public company to obtain a certificate of commencement along with a certificate of incorporation before starting business.
(c) No restriction on advancing loans to the directors: In the case of a private company, there is no restriction on the amount of loans that can be granted to the directors. No prior permissions are required to be sought for advancing such loans. In contrast, a public company has to seek permission from the government before advancing loans to its directors.
(d) Lesser number of directors required for operations: A private company can continue operations with just two directors, whereas a public company must have at least three directors to continue its operations.
Q7 :The capital of a company is divided into number of parts each one of which are called
(a) Dividend
(b) Profit
(c) Interest
(d) Share
Answer :
The capital of a company is divided into a number of parts, each one of which is called a share. These parts (or shares) are freely transferable except in the case of a private company.
Hence, the correct answer is option (d).
Q8 :How does a cooperative society exemplify democracy and secularism? Explain.
Answer :
In a cooperative society, management is in the hands of a managing committee elected by the members of the society. The elections in such societies are governed by the principle of ‘one member, one vote’. This implies that all members have equal voting rights irrespective of the amount of capital they have contributed to the society. This principle prevents the dominance of the richer members (who may own a higher number of shares) in the decision-making process. Thus, as in a democracy, a cooperative society treats all its members equally and provides equal rights to its members. Moreover, there is no discrimination among the members on the basis of their religion, caste or sex. In addition, the members are free to elect the members of the managing committee of their choice. Therefore, a cooperative society exemplifies a secularist system.
Q9 :What is meant by ‘partner by estoppel’? Explain.
Answer :
A person can be regarded as a ‘partner by estoppel’, if he or she through his/her actions or behaviour, leaves an impression on third parties that he or she is a partner in a particular firm. This means that if a person behaves in a manner that makes third parties consider this individual as one of the actual partners, then he or she is regarded as a ‘partner by estoppel’. Such a partner (by estoppel) is actually not a partner, as he or she neither contributes any capital to the firm nor actively participates in the operations of the firm and is not entitled to any share in the firm’s profits or losses. Nevertheless, he or she can be held liable for the debts that the firm owes to third parties. Accordingly, if the funds available to the firm fall short of requirement for the repayment of debts, then the private assets of a partner by estoppel can be used to repay the debts.
Q10 :The Head of the joint Hindu family business is called
(a) Proprietor
(b) Director
(c) Karta
(d) Manager
Answer :
The head of a joint Hindu family business is called the karta. The karta is the eldest male member of a joint Hindu family who is responsible for the control and management of the joint Hindu family business and has unlimited liability.
Hence, the correct answer is option (c).
Q11 :Provision of residential accommodation to the members at reasonable rate is the objective of
(a) Producer’s cooperative
(b) Consumer’s cooperative
(c) Housing cooperative
(d) Credit cooperative
Answer :
A housing cooperative has the responsibility of ensuring the provision of residential accommodation to the members at a reasonable rate. A housing cooperative aims at providing accommodation to its members by constructing houses and giving them the option of paying the cost in installments.
Hence, the correct answer is option (c).
Q12 :A partner whose association with the firm is unknown to the general public is called
(a) Active partner
(b) Sleeping partner
(c) Nominal partner
(d) Secret partner
Answer :
A secret partner in a firm is a partner whose association with the firm is unknown to the general public. Secret partners do not contribute any capital to the business but have participation rights in the management of the partnership firm. They are also entitled to a share in the profits and losses of the business and have unlimited liabilities.
Hence, the correct answer is option (d).
Long answers : Solutions of Questions on Page Number : 53
Q1 :What do you understand by a sole proprietorship firm? Explain its merits and limitation?
Answer :
In a sole proprietorship form of business, the business is owned, managed and controlled by a single individual who is known as the sole proprietor. As the sole owner of the business, the proprietor becomes the single recipient of all the profits earned by the business and, in the same way, has to bear all losses.
Merits of Sole Proprietorship
A sole proprietor enjoys the following benefits.
(a) Ease in formation and closure of business: There are hardly any legal formalities to be fulfilled for setting up a sole proprietorship firm. However, if a proprietor is dealing in drugs and liquor products, then a licence has to be acquired. The procedure for closing down a sole proprietorship firm is also hassle-free and easy.
(b) Quick decision making: A sole proprietor enjoys complete control over the business. This makes decision making quick and easy.
(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 in the business. Thus, this direct link between efforts and rewards motivates the sole proprietor to operate the business efficiency and effectively.
Limitations of Sole Proprietorship:
The following are a few limitations of a sole proprietor firm.
(a) Limited capital: The financial resources that are available to a sole proprietor are limited merely to this person’s personal savings and borrowings that can be raised from relatives and friends. Thus, the amount of capital available to a sole proprietor is limited, which often prevents him or her from expanding the business.
(b) Limited managerial abilities: A sole proprietor manages all the core functions such as purchasing, selling and planning. As a result, the benefits of specialisation are not available to a sole proprietor. Also, because of limited resources, a sole proprietor may not be able to employ specialised employees to handle specific business operations.
(c) Uncertain life: In the eyes of the law, a sole proprietor and his or her business are regarded as the same entity. In the event of death, insanity, bankruptcy or physical ailment of a sole proprietor, the life of the business is adversely affected.
Q2 :Why is partnership considered by some to be a relatively unpopular form of business ownership? Explain the merits and limitations of partnership.
Answer :
Partnership is considered to be a relatively unpopular form of business ownership because of the various limitations associated with it. These limitations include unlimited liability, limited resources, possibility of conflicts and lack of continuity.
Limitations of Partnership
(a) Unlimited liability: In a partnership, all the partners have unlimited liability. This means that if the firm’s assets fall short of the requirement for the repayment of the firm’s debts, then the personal assets of the partners can be used.
(b) Limited resources: A partnership firm faces limited availability of finance, because of the restrictions imposed on the following fronts:
(i) maximum number of partners allowed in a partnership firm by definition
(ii) maximum nuber of new partners who can be admitted in the firm
Hence, as a result, a partnership firm faces financial constraints, which in turn impedes its growth prospects.
(c) Possibility of conflicts: In a partnership firm, the power of decision making is shared among the partners. This further depends on their respective levels of skills, capabilities and foresightedness. The differences in these qualities may possibly lead to conflicts among the partners.
Merits of Partnership
(a) Easy formation and closure: A partnership firm involves an agreement (either oral or written) between two or more partners. The registration of a partnership firm is not compulsory, which eases its formation. Similarly, a partnership firm can be shut down at any time with the mutual consent of all the partners.
(b) Balanced decision making: In a partnership firm, all the decisions related to the business are taken collectively by all the partners. This makes the decision-making process in a partnership firm comparatively more balanced than in any other form of business ownership.
(c) Sharing of risks: The risks in a partnership firm are shared jointly by all the partners. As a result, anxiety, burden and stress of the individual partners are shared among all the partners, which reduces the burden on a single partner.
Q3 :Why is it important to choose an appropriate form of organisation? Discuss the factors that determine the choice of form of organisation.
Answer :
The choice of an appropriate form of business organisation is important for the following reasons.
(a) Options to choose among various business forms: As there exist numerous forms of business organisations such as sole proprietorship, partnership, cooperative society and company, the choice of an appropriate business organisation is important, because each business form has its own merits and demerits.
(b) Business factors: Every type of business form is influenced by its respective business-related factors, namely, need of funds, risk involved, amount of profits and legal obligations. Therefore, the choice of the appropriate business form is made only after the evaluation of all these business factors.
(c) Long-term growth prospects: The growth prospects of each type of business form are different. If a businessperson opts for a particular business form without correctly evaluating the growth prospects, then the business may fail or the long-term growth prospects of the business will suffer.
Factors determining Choice of a Business Form
The following are the factors that determine the choice of a business organisation.
(a) Nature of business activity: Any individual first needs to decide upon the nature or kind of business activity that he or she desires to undertake. In case the business type requires direct personal contact with customers, then the sole proprietorship form of business proves beneficial. On the other hand, if direct personal contact is not required, then a partnership or a company form of business is more suitable.
(b) Degree of control: The choice of a business form also depends on the degree of control that a businessperson wants to exercise over its management. If a businessperson aims to have direct control over all the business operations, then sole proprietorship may be considered appropriate. However, if he or she does not mind sharing the decision-making powers with others, then a partnership or company form of business would be more suitable.
(c) Degree and specialisation of managerial abilities: If the business operations are large and require specialised and skilled professionals for managing them, then a company form of business may be selected. However, if the business operations are not very complex and the scale of operations is also not very large, then sole proprietorship proves to be a better alternative.
Q4 :Discuss the characteristics, merits and limitations of cooperative form of organisation. Also describe briefly different types of cooperative societies.
Answer :
The word ‘cooperative’ means an organisation in which the stakeholders work with one another. Thus, a cooperative society is a voluntary association of individuals who join together to protect or promote their common interests.
Features of Cooperative Societies
(a) Separate legal entity: The registration of a cooperative society is compulsory under the Cooperative Societies Act, 1912. Once the registration is complete, the cooperative society is granted the status of a separate legal entity. This implies that the cooperative society can hold properties in its own name and enter into contracts. Moreover, it can sue others and can be sued by others.
(b) Management and control: A cooperative society is a democratic form of organisation as it is managed and controlled by a managing committee which is elected by the members of the society on the principle of ‘one member, one vote’.
Merits of Cooperative Societies
(a) Ease of formation: The formation of a cooperative society is quite easy as it requires the induction of only 10 adult members. The registration procedure of a society under the Cooperative Societies Act, 1912, is quite simple.
(b) Continued existence: A cooperative society is a stable form of organisation as it enjoys the status of a separate legal entity that is considered distinct from its members. As a result, the life of a cooperative society remains unaffected by the death, insolvency or insanity of its members.
Limitations of Cooperative Societies
(a) Excessive government control: Cooperative societies have to follow certain rules and regulations as imposed on them by the cooperative departments of the state government concerned. These rules include submission and auditing of accounts.
(b) Inefficiency in management: The management of a cooperative society generally comprises part-time or inexperienced people. They may not be well equipped with the skills required to handle the managerial functions effectively. Consequently, cooperative societies often lack efficiency.
Types of Cooperative Societies
Cooperative societies are classified into the following six types.
(a) Consumer cooperative societies: These are formed to provide consumer goods at reasonable prices to its members.
(b) Producer cooperative societies: The objective of producer cooperative societies is to procure raw materials and other inputs at low costs and supply them to small producers.
(c) Marketing cooperative societies: These societies pool the outputs of the member and perform certain marketing functions for them such as transportation, labelling, packaging and warehousing.
(d) Farmers’ cooperative societies: Such societies are formed by small farmers who pool their resources to reap the benefits associated with large-scale operations. These societies ensure the availability of better and advanced inputs at low rates to farmers.
(e) Credit cooperative societies- These societies ensure the availability of funds to its members at comparatively low interest rates on reasonable terms.
(f) Cooperative housing societies: The aim of housing cooperative societies is to solve the problem of finding residential accommodation of its members by constructing houses for them. These societies provide its members with easy repayment schemes through which the cost of the houses can be repaid in form of installments.
Q5 :Distinguish between a Joint Hindu family business and partnership.
Answer :
| 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 A |
| 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. |
Q6 :Despite limitations of size and resources, many people continue to prefer sole proprietorship over other forms of organisation? Why?
Answer :
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.