NCERT Solutions for Class 11 Business Studies Chapter 2

NCERT Solutions for Class 11 Business Studies Chapter 2 Forms of Business Organisation. Chapter end exercise answers, long answers type questions and short answers type questions are given with answers.

All the answers are prepared by subject experts for the academic session 2020-2021.

11th Business Studies Chapter 2 Forms of Business Organisation

Class: 11Business Studies
Chapter: 2Forms of Business Organisation
Contents:NCERT Solutions, Long and Short Answers Type

Class 11 Business Studies Chapter 2 Solutions

Short Answer Questions

Compare the status of a minor in a Joint Hindu Family Business with that in a partnership firm.

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.

If registration is optional, why do partnership firms willingly go through this legal formality and get themselves registered? Explain.

Although registration in case of a partnership firm is optional and not enforced by law, yet many firms voluntarily opt for it. This is because the partners want to avoid legal disadvantages and disputes that arise because of 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 and may bear a huge loss.

State the important privileges available to a private company.

A private company enjoys various exemptions or privileges which are often not available to a public company. Some of the privileges enjoyed by a private company are given below:
Less number of members required: A private company requires only two members for formation, while a public company requires at least seven members.
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.
No restriction on advancing loans to the directors: There is no restriction in the case of a private company for the amount of loans that can be granted to the directors. No prior permission is 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.
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.

How does a cooperative society exemplify democracy and secularism? Explain.

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”. All members have equal voting rights irrespective of the amount of capital they have contributed to the society. This principle prevents the superiority of the richer members who 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.

What is meant by ‘partner by estoppel’? Explain.

If a person acts and behaves in such a way that leaves an impression on third parties that he or she is a partner in a particular firm, it can be regarded as a ‘partner by estoppel’. This means that if a person behaves in a manner that makes third parties consider this individual as one of the actual partners. Such a partner 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.

Explain the following terms in brief (a) Perpetual succession (b) Common seal (c) Karta (d) Artificial person.
    • (a) Perpetual succession: It implies that a company continues to exist until it is forced by the law to wind up. This implies that a company has a separate legal entity and cannot come to an end by itself. It 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. Thus the role of a common seal becomes significant. It 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: Karta is the head of a joint Hindu family who owns and runs a family business. The karta of a Joint Hindu family is responsible for decision making and carrying business operations of the family business. He is the eldest member of the family with full control and has unlimited liabilities.
    • (d) Artificial person: By the term artificial person, we mean that a company is considered as a separate legal entity under the law and is a juristic person. However, unlike human beings, a company, as an artificial person, cannot sign the documents. However a company does have its own life that is truly independent and is not affected by the life/death of its members.

11th B. St. Chapter 2 Long Answer Questions

What do you understand by a sole proprietorship firm? Explain its merits and limitation?

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: The legal formalities are handful to be dealt with for setting up a sole proprietorship firm. The exception being 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. There is no interference.
(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 available to a sole proprietor are limited merely to this person’s personal savings and borrowings that can be raised from outside sources. Thus, expansion prospect of the sole business is impacted.
(b) Limited managerial abilities: A sole proprietor manages all the important functions such as purchasing, selling and planning, due to which, 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 circumstances of death, insanity, bankruptcy or physical disability of a sole proprietor, the life of the business is adversely affected.

Why is partnership considered by some to be a relatively unpopular form of business ownership? Explain the merits and limitations of partnership.

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 implies 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 number of new partners who can be admitted in the firm
Hence, as a result, a partnership firm faces financial constraints further affecting growth prospects.
(c) Possibility of conflicts: In a partnership firm, the power of decision making is shared among the partners. Every partner has their own opinion and difference of opinion can lead to a dispute among 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 (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: All the decisions related to the business are taken unanimously 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 individual partners have less burden of liability as it is shared among all the partners.

Why is it important to choose an appropriate form of organisation? Discuss the factors that determine the choice of form of organisation.

The choice of an appropriate form of business organisation is important for the following reasons.
(a) Options to choose among various business forms: There are various 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: A number of factors influence respective business 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 if a business is feasible or not.
(c) Long-term growth prospects: The growth prospects of each type of business form are different. If a business person 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.

Discuss the characteristics, merits and limitations of cooperative form of organisation. Also describe briefly different types of cooperative societies.

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.

    1. Consumer cooperative societies: These are formed to provide consumer goods at reasonable prices to its members.
    2. 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.
    3. 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.
    4. 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.
    5. Credit cooperative societies:These societies ensure the availability of funds to its members at comparatively low interest rates on reasonable terms.
    6. 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.
Distinguish between a Joint Hindu family business and partnership
Basis of differenceJoint Hindu Family BusinessPartnership
GovernanceGoverned by the Hindu law.Governed by Partnership Act, 1932.
LiabilityThe 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 controlThe karta is responsible for the management and control of the business.All the partners jointly manage and control the firm.
Number of membersMinimum: 2, Maximum: No limitMinimum: 2, Maximum: 10 for the banking business and 20 for other businesses
MinorMinors can be admitted members.Minors cannot be admittedmembers.
Despite limitations of size and resources, many people continue to prefer sole proprietorship over other forms of organisation? Why?

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.