Chapter 2 Forms of Business organization - BST class 11th

Different forms of Business

The important factors determining the choice of organization are listed

FORCE-NO

1	F	Formation and closure Cost and ease in setting up the organization
2	O	Overall Liability
3	R	Risk bearing - Risk bearer and profit recipient
4	C	Continuity
5	C	Control-Decision making
6	C	Capital
7	E	Entity -Distinct separate legal entity or not
8	N	Nature of business
9	O	Other – Management Ability or Any thing particular to business

Meaning of Sole proprietors

Do you often go in the evenings to buy registers, pens, chart papers, etc, from a small neighborhood stationery store? Well, in all probability in the course of your transactions, you have interacted with a sole proprietor.

Sole proprietorship is a popular form of business organization and is the most suitable form for small businesses, especially in their initial years of operation.

This form of business is particularly common in areas of personalized services such as beauty parlours, hair saloons and small scale activities like running a retail shop in a locality.

Definition:

Sole proprietorship refers to a form of business organisation which is owned, managed and controlled by an individual who is the recipient of all profits and bearer of all risks. This is evident from the term itself. The word “sole” implies “only”, and “proprietor” refers to “owner”. Hence, a sole proprietor is the one who is the only owner of a business.

Features of sole proprietorship organization.

Salient characteristics of the sole proprietorship form of organization are as follows:

FORCE-NO

1	F	Formation and closure Cost and ease in setting up the organization
2	O	Overall Liability
3	R	Risk bearing - Risk bearer and profit recipient
4	C	Continuity
5	C	Control
6	C	Capital
7	E	Entity - Entity -Distinct separate legal entity or not
8	N	Nature of business
9	O	Other – Management Ability or Anything particular to business

Detailed:

1	Formation and closure	Chaurasia pan bhandar COACHING CENTRE Grossary shops Tailoring Start with Deepak Chaurasia with chaurasia pann bhanadar There is no separate law that governs sole proprietorship. Hardly any legal formalities are required to start a sole proprietary business, though in some cases one may require a license. Closure of the business can also be done easily. Thus, there is ease in formation as well as closure of business.
2	Overall Liabilities – Unlimited liabilities	Unlimited Liability: Sole proprietors have unlimited liability. This implies that the owner is personally responsible for payment of debts in case the assets of the business are not sufficient to meet all the debts. As such the owner’s personal possessions such as his/her personal car and other assets could be sold for repaying the debt. Suppose the total outside liabilities of Chaurasia paan bandar , a sole proprietorship firm, are Rs. 1,00,000 at the time of dissolution, but its assets are Rs. 70,000 only. In such a situation the proprietor will have to bring in Rs. 30,000 from his personal sources even if he has to sell her personal property to repay the firm’s debts.
3	Risk bearing - Sole risk bearer and profit recipient:	Risk toh Mr chaurasia ka hi hai The risk of failure of business is borne all alone by the sole proprietor. However, if the business is successful, the proprietor enjoys all the benefits. He receives all the business profits which become a direct reward for his risk bearing.
4	Continuity -Lack of business continuity	Explain. How death of chaursia will result into closure, expalian successor issue in the business family. The sale proprietorship business is owned and controlled by one person, therefore death, insanity, imprisonment, physical ailment or bankruptcy of the sole proprietor will have a direct and detrimental effect on the business and may even cause closure of the business
5	Control	Chaurasia ji ka bachan hi kannon hain . ye mahismmati ko raj hain and mera bachan hi sambidhan hain. Explain The right to run the business and make all decisions lies absolutely with the sole proprietor. He can carry out his plans without any interference from others
6	Capital	All Capital is brought by single owner .
7	Entity - No separate legal entity	No Separate legal entity to sole proprietorship firm, separate from proprietor. In the eyes of the law, no distinction is made between the sole trader and his business, as business does not have an identity separate from the owner. The owner is, therefore, held responsible for all the activities of the business
8	Nature of business	Most suitable when size of business is small.
9	Other – Management Ability or Any thing particular to business	It is easy to maintain confidentiality of information apart from other benefit. If management is capble then management can take business on sky high.

Examination Question :

Question 1. A Sole proprietor has

Limited Liability
Unlimited liability
No liability for debts
Joint liability

Ans. b) Unlimited liability

Question 2. Sole proprietary business is suitable when market is:

(a) Non Existent

(b) National

(d) Global

Answer:

(c) The sole proprietorship business is most suitable where the market for the product is small and local, where the capital requirement is small and the risk involvement is not too heavy. Thus, Option C is correct.

Question 3. The liability of a sole trader is limited to the extent of capital introduced by him into the business True/False? Give reason.

ANS - False: A sole trader has a unlimited liability. In the case of business losses, if the business assets are not sufficient to meet all business liabilities, he May Have to sell his personal property to Pay off the liabilities.

Question 4 CASE STUDIES -Must explain how to read case studies.

Seth Girdhari lal is the only owner of a shirt manufacturing factory, He took a loan of 40 lakh from a finance company for expansion of his business. In the beginning his business was running well but later on he started incurring losses and due to continuous losses he was not able to repay the loan. After receiving many reminders from the finance company, Seth girdhari lal planned to close the business. He sold all his machines and other assets and realised 30 lakh. He requested the finance company to settle the accounts at 30 lakh. But the finance company refused, and on his failure to pay the total debt, it filed a case against him in the court. Seth girdhari lal gave an argument in the court that he had sold all his business assets, and the loan was taken by him for business, not for his personal use. So the finance company must settle the account at 30 lakh. The court did not agree with the argument of seth giedhari lal and gave the decision in favour of the finance company. He was ordered to pay full amount of loan by selling off his personal assets.

Question : Identify the form of business carried on by seth giedhari lal .(sole proprietorship)

State the feature of the form of business identified in which is considered by the court giving the judgement. (Unlimited Liability)

Sole proprietors have unlimited liability. In the case of business losses, if the business assets are not sufficient to meet all business liabilities, the proprietor may have to sell his personal property to pay off the liabilities

State why Seth girdharti lal argument was not correct.

Seth Girdhari lal argument was not correct because a sole proprietor does not enjoy separate legal entity

Merits of Sole proprietorship organization

Sole proprietorship offers many advantages. Some of the important ones are as follows:

CDS-EQ

1	Confidentiality of information
2	Direct incentive
3	Sense of accomplishment
4	Ease of formation and closure
5	Quick decision making

1	Confidentiality of information	Chaurasia paan bhandar and secrecy Sole decision making authority enables the proprietor to keep all the information related to business operations confidential and maintain secrecy. A sole trader is also not bound by law to publish firm’s accounts.
2	Direct incentive	A sole proprietor directly reaps the benefits of his/her efforts as he/she is the sole recipient of all the profit. The need to share profits does not arise he/she is the single owner. This provides maximum incentive to the sole trader to work hard
3	Sense of accomplishment	पूर्णता का समझ, Atma Bodh , wah wah. There is a personal satisfaction involved in working for oneself. The knowledge that one is responsible for the success of the business not only contributes to self-satisfaction but also instils in the individual a sense of accomplishment and confidence in one’s abilities.
4	Ease of formation and closure	An important merit of sole proprietorship is the possibility of entering into business with minimal legal formalities. There is no separate law that governs sole proprietorship. As sole proprietorship is the least regulated form of business, it is easy to start and close the business as per the wish of the owner.
5	Quick decision making	A sole proprietor enjoys considerable degree of freedom in making business decisions. Further the decision making is prompt because there is no need to consult others. This may lead to timely capitalisation of market opportunities as and when they arise.

Limitation of Sole proprietorship

Proprietorship form of organization is not free from limitations. Some of the major limitations

of sole proprietorship are as follows:

1	Limited resources
2	Limited life of a business concern
3	Limited managerial ability
4	Unlimited liability

Detailed:

1	Limited resources	CHAURASIA PAN BHANDAR Resources of a sole proprietor are limited to his/her personal savings an borrowings from others. Banks and other lending institutions may hesitate to extend a long term loan to a sole proprietor. Lack of resources is one of the major reasons why the size of the business rarely grows much and generally remains small
2	Limited life of a business concern	The sole proprietorship business is owned and controlled by one person, so death, insanity, imprisonment, physical ailment or bankruptcy of a proprietor affects the business and can lead to its closure
3	Limited managerial ability	The owner has to assume the responsibility of varied managerial tasks such as purchasing, selling, financing, etc. It is rare to find an individual who excels in all these areas. Thus decision making may not be balanced in all the cases. Also, due to limited resources, sole proprietor may not be able to employ and retain talented and ambitious employees.
4	Unlimited liability	A major disadvantage of sole proprietorship is that the owner has unlimited liability. If the business fails, the creditors can recover their dues not merely from the business assets, but also from the personal assets of the proprietor. A poor decision or an unfavourable circumstance can create serious financial burden on the owner. That is why a sole proprietor is less inclined to take risks in the form of innovation or expansion

Joint Hindu Family Business

Meaning of Joint Hindu Family Business

Rajnish kumar HUF

Gen-1

KARTA -CO-PARCENER -

Wife -Laxmi -MEMBER

At Least two persons and with Ancestral Property

Gen 2

Son – Dhana - co parcener-

Daughter -Rani – Co parcener

At the time of marriage of raj with shanti

Shanti will become member of Rajnish kumar HUF

Rani married to maha raja

Rani will continue to be co parcener of Rajnish kumar huf unless she is relinquished from this.

JUST BEFORE MARRIAGE PAPER SIGN KARA LIYE JATE HAIN.

Gen 3

Childern of raj and shanti will be co parcener –

Children of rani and maharaja will neither be co parcener nor member

Definition:

Under Hindu Law, an HUF is a family which consists of all persons lineally descended from a common ancestor and includes their wives and unmarried daughters. An HUF cannot be created under a contract, it is created automatically in a Hindu Family.

HUF refers to a form of organization wherein the business is owned and carried on by the members of the Hindu Undivided Family (HUF). It is governed by the Hindu Law. The basis of membership in the business is birth in a particular family and three successive generations can be members in the business.

The business is controlled by the head of the family who is the eldest member and is called karta. All members have equal ownership right over the property of an ancestor and they are known as co-parceners OR member. HUF is governed by Hindu law.

The Hindu Undivided Family (HUF) grants a daughter-in-law the status of a member of the family from the date of her marriage, but this does not make her a coparcener. ... The daughters-in-law do not have right over the self-acquired property of her in-laws.

Joint Hindu family business is a specific form of business organisation found only in India. It is one of the oldest forms of business organisation in the country.

Features of Joint Hindu Family Business

The following points highlight the essential characteristics of the joint Hindu family business.

1		F		Formation and closure Cost and ease in setting up the organization
2		O		Overall Liability
3		R		Risk - Risk bearer and profit recipient
4		C		Continuity
5		C		Control
6		C		Capital
7		E		Entity
8		N		Nature of business
9		O		Other – Management Ability or Any thing particular to business
1	F		Formation and closure Cost and ease in setting up the organization		Hindus, Buddhists, Jains and Sikhs can form HUFs. HUF usually has assets which come as a gift, a will, or ancestral property, or property acquired from the sale of joint family property or property contributed to the common pool by members of HUF. Once a HUF is formed it must be formally registered in its name To create a HUF, 3 things are required i.e. Step 1: Create HUF Deed Step 2: Apply for HUF PAN Card Step 3: Open Bank Account of HUF The names of the members of the HUF and the name of the HUF are also required to be stated in the HUF Deed at the time of creation of HUF. The name of the HUF is usually the name of the Karta followed by the word HUF. For eg: If the Karta of the HUF is Rajnish Kumar, the name of his HUF would be Rajnish Kumar HUF
2	O		Overall Liability		The liability of all members except the karta is limited to their share of co-parcenery property of the business. The karta, however, has unlimited liability
3	R		Risk - Risk bearer and profit recipient		Karta is the risk bearer of HUF Business.
4	C		Continuity		The business continues even after the death of the karta as the next eldest member takes up the position of karta, leaving the business stable. The business can, however, be terminated with the mutual consent of the members
5	C		Control		The control of the family business lies with the karta. He takes all the decisions and is authorised to manage the business
6	C		Capital		Ancestral property Gifts
7	E		Entity		HUF is a separate legal entity for tax purpose – No co-parcener is liable to third party liabilities.
8	N		Nature of business		Under Hindu Law, an HUF is a family which consists of all persons lineally descended from a common ancestor and includes their wives and unmarried daughters. An HUF cannot be created under a contract, it is created automatically in a Hindu Family.
9	O		Other – Treatment to Minor Members		The inclusion of an individual into the business occurs due to birth in a Hindu Undivided Family. Hence, minors can also be members of the business.

Partnership

Meaning of Partnership Firm

Like ram and shyam two different person- Ram and shyam Enterprises

As the business expands, one needs more capital and larger number of people to manage the Business and share its risks. In such a situation, people usually adopt the partnership form of organisation.

When two or more persons join hands to set up a business and share its profits and losses, they are said to be in partnership. Section 4 of the Indian Partnership Act, 1932 defines partnership as the 'relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all'.

Persons who have entered into partnership with one another are individually called 'partners' and collectively called 'firm'. The name under which the business is carried is called the 'firm's name.

A partnership firm has no separate legal entity, apart from the partners constituting it.

Definitions

1. L.H. Haney

Partnership Is the relation between persons competent to make contract, who agree to carry on a lawful business in common with a view to private gain." -

2. The Indian Contract Act 1872

"Partnership is the relation which subsists between persons who have agreed to combine their property, labour or skill in some business and to share the profits therefrom between them."

Features of partnership:

Major characteristics of the partnership form of business organization are following

1	F	Formation and closure Cost and ease in setting up the organization	The partnership form of business organisation is governed by the Indian Partnership Act, 1932. Partnership is the result of an agreement between two or more persons to do business and share its profits and losses. The agreement becomes the basis of relationship between the partners. lt is not necessary that such agreement is in written form. An oral agreement is equally valid. But in order to avoid disputes, it is preferred that the partners have a written agreement. The agreement should be to carry on some business. Mere co-ownership of a property does not amount to partnership. For example, if Champa and Chameli jointly purchase a plot of land, they become the joint owners of the property and not the partners. But if they are in the business of purchase and sale of land for the purpose of making profit, they will be called partners. The agreement between partners must be to share profits and losses of a business. If some persons join hands for the purpose of some charitable activity, it will not be termed as partnership.
2	O	Overall Liability	The partners of a firm have unlimited liability. Personal assets may be used for repaying debts in case the business assets are insufficient to pay business debts. Further, the partners are jointly and individually liable for payment of firm's debts. Jointly, all the partners are responsible for the debts and they contribute in their profit sharing ratio. Individually, each partner can be held responsible to repay the debts of the business. However, such a partner can later recover the balance amount from other partner(s). For example, Ram and Shyam are partners of a firm sharing profits and losses equally. The assets of the firm amount to R2,00,000 but the firm's debts are 2,50,000. Here, Ram and Shyam are liable to bring R25,000 each from their personal property to pay the firm's debts. But if suppose Shyam is insolvent and cannot bring any amount, then Ram alone will be liable to pay firm's debt of 50,000 because of his unlimited liability.
3	R	Risk - Risk bearer and profit recipient	The partners bear the risks involved in running a business as a team. The reward comes in the form of profits which are shared by the partners in an agreed ratio. However, they also share losses in the same ratio in the event of the firm incurring losses.
4	C	Continuity	Partnership is characterized by lack of continuity of business since the death, retirement, insolvency or insanity of any partner can bring an end to the business. However, the remaining partners may if they so desire continue the business on the basis of a new agreement
5	C	Control	The partners share amongst themselves the responsibility of decision making and control of day to day activities. Decisions are generally taken with mutual consent. Thus, the activities of a partnership firm are managed through the joint efforts of all the partners.
6	C	Capital	Capital is contributed by partners as per agreements
7	E	Entity	A partnership firm has no separate legal entity
8	N	Nature of business	The business of a partnership concern may be carried on by all the partners or any of them acting for all. This statement has two important implications: First, every partner is entitled to participate in the conduct of the affairs of its business. Second, that there exists a relationship of mutual agency between all the partners. Each partner carrying on the business is the principal as well as the agent for all the other partners. He can bind other partners by his acts and also is bound by the acts of other partners with regard to business of the firm. Relationship of mutual agency is so important that one can say that there would be no partnership, if the element of mutual agency is absent
9	O	Other – Management Ability or Any thing particular to business	The minimum number of partners needed to start a partnership firm is two. According to section 464 of the Companies Act 2013, maximum number of partners in a partnership firm can be 100, subject to the number prescribed by the government. As per Rule 10 of The Companies (miscelleneous) Rules 2014, at present the maximum number of members can be 50.

Merits of partnership Firm

The following points describe the advantages of a partnership firm.

FMS- Balanced decision making

1	Ease of formation and closure
2	More funds
3	Sharing of risks
4	Secrecy
5	Balanced decision making

Detail:

1	Ease of formation and closure	Ease of formation and closure: A partnership firm can be formed easily with an agreement between two or more persons to carry some lawful business. Registration is not compulsory. Closure of the firm too is an easy task
2	More funds	In a partnership, the capital is contributed by a number of partners. This makes it possible to raise larger amount of funds as compared to a sole proprietor and undertake additional operations when needed
3	Sharing of risks	The risks involved in running a partnership firm are shared by all the partners. This reduces the anxiety, burden and stress on individual partners.
4	Secrecy	A partnership firm is not legally required to publish its accounts and submit its reports. Hence it is able to maintain confidentiality of information relating to its operations
5	Balanced decision making	Different partners having expertise in different areas of functions can take correct decisions with the consent of all other partners. As a result, decisions are likely to be more balanced.

Limitation of partnership firm

A partnership firm of business organisation suffers from the following limitations:

LLLLP:

1	liability - Unlimited liability
2	Limited resources
3	Lack of continuity
4	Lack of public confidence
5	Possibility of conflicts

Detailed:

1	liability - Unlimited liability	The partners of a firm have unlimited liability. Personal assets may be used for repaying debts in case the business assets are insufficient to pay business debts. The liability of partners is both joint and several which may prove to be a drawback for those partners who have greater personal wealth. They will have to repay the entire debt in case the other partners are unable to do so.
2	Limited resources	There is a restriction on the number of partners, and hence contribution in terms of capital investment is usually not sufficient to support large scale business operations. As a result, partnership firms face problems in expansion beyond a certain size.
3	Lack of continuity	Partnership comes to an end with the death, retirement, insolvency or lunacy of any partner. It may result in lack of continuity. However, the remaining partners can enter into a fresh agreement and continue to run the business
4	Lack of public confidence	A partnership firm is not legally required to publish its financial reports or make other related information public. It is, therefore, difficult for any member of the public to ascertain the true financial status of a partnership firm. As a result, the confidence of the public inpartnership firms is generally low.
5	Possibility of conflicts	Partnership is run by a group of persons wherein decision making authority is shared. Difference in opinion on some issues may lead to disputes between partners. Further, decisions of one partner are binding on other partners. Thus, an unwise decision by some-one may result in financial ruin for all others. In case a partner desires to leave the firm, this can result in termination of partnership as there is a restriction on transfer of ownership.

Registration of partnership firm

Registration of partnership firm is not compulsory but if it is registered then then firm and partners have a lot of legal benefit.

Now question comes how a firm can be registered-

Registration of a partnership firm means the entering of the firm’s name, along with the relevant prescribed particulars, in the Register of firms kept with the Registrar of Firms. It provides conclusive proof of the existence of a partnership firm.

It is optional for a partnership firm to get registered. In case a firm does not get registered, it is deprived of many benefits.

The consequences of non-registration of a firm are as follows:

Suit Against firm or other partners

A partner of an unregistered firm cannot file a suit against the firm or other partners

Suit against third parties

The firm cannot file a suit against third parties, and

Suit by firm against partners

The firm cannot file a case against the partners.

In view of these consequences

It is therefore advisable to get the firm registered. According to the India Partnership Act 1932, the partners may get the firm registered with the Registrar of firms of the state in which the firm is situated. The registration can be at the time of formation or at any time during its existence. The procedure for getting a firm registered is as follows:

1	Submission of form	Submission of application in the prescribed form to the Registrar of firms. Dually filled application should be This application should be signed by all the partners. The application should contain the following particulars
i	Name	Name of the firm
ii	Location	Location of the firm
iii	Other location	Names of other places where the firm carries on business
iv	Date of joining	The date when each partner joined the firm
v	Name and address	Names and addresses of the partners
v	Duration	Duration of partnership
2	Fee Deposit	Deposit of required fees with the Registrar of Firms.
3	Entry in register and issuance of COR.	The Registrar after approval will make an entry in the register of firms and will subsequently issue a certificate of registration

Partnership Deed

A partnership deed is an agreement between the partners of a firm that specifies the terms and conditions of partnership among the partners.

It is not essential to have a written agreement. it is advisable to have a written agreement as it constitutes

an evidence of the conditions agreed upon.

In order to enter into partnership, a clear agreement with respect to the terms, conditions and all aspects concerning the partners is essential so that there is no misunderstanding later among the partners. Such an agreement can be oral or written.

The partnership deed generally includes the following aspects:

NDI-STP-Methods

1	N	Name of firm
2	N	Nature of business and location of business
3	D	Duration of business
4	D	Distribution of profits and losses
5	D	Duties and obligations of the partners
6	I	Investment made by each partner
7	I	Interest on capital and interest on drawings
8	S	Salaries and withdrawals of the partners
9	T	Terms governing admission, retirement and expulsion of a partner
10	P	Procedure for dissolution of the firm
11	P	Preparation of accounts and their auditing
12	M	Method of solving disputes

Types of Partners

A partnership firm can have different types of partners with different roles and liabilities. An understanding of these types is important for a clear understanding of their rights and responsibilities. These are described as follows:

Active partner

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