class 11 notes

Class 11 Business Studies Notes Chapter 2 (Forms of Business Organisation) – Business Studies Book

Philoid

Philoid

— 9 min read

Business Studies
Alright class, let's get straight into Chapter 2: Forms of Business Organisation. This is a fundamental chapter, crucial not just for your Class 11 understanding but also frequently tested in various government exams. Pay close attention to the features, merits, and limitations of each form, especially concerning liability, continuity, and legal status.

Chapter 2: Forms of Business Organisation - Detailed Notes

A business enterprise is an institutional arrangement to conduct any type of business activity. Choosing the right form of organisation is critical for the success of any business. The main forms are:

1. Sole Proprietorship

  • Meaning: A business owned, managed, and controlled by a single individual. The owner and the business are considered one and the same in the eyes of the law.
  • Features:
    • Single Ownership: Owned by one person.
    • Formation & Closure: Easy to start and dissolve with minimal legal formalities.
    • Unlimited Liability: The owner is personally liable for all business debts. Personal assets can be used to pay off business liabilities if business assets are insufficient. (Very Important for Exams)
    • No Separate Legal Entity: The business has no identity separate from the owner.
    • Risk Bearer & Profit Recipient: The sole proprietor bears all the risks and receives all the profits.
    • Control: Complete control rests with the owner.
    • Lack of Business Continuity: Business existence is tied to the owner's life, health, and solvency. Death, insolvency, or illness of the proprietor affects the business.
  • Merits:
    • Quick Decision Making: Sole owner makes all decisions promptly.
    • Confidentiality: Business secrets are easily maintained.
    • Direct Incentive: All profits belong to the owner, motivating hard work.
    • Sense of Accomplishment: Personal satisfaction from building a business.
    • Ease of Formation & Closure: Minimal legal hurdles.
  • Limitations:
    • Limited Resources: Financial resources are restricted to the owner's personal savings and borrowing capacity.
    • Limited Life of Business: Uncertainty of continuity.
    • Unlimited Liability: Major drawback; discourages risk-taking.
    • Limited Managerial Ability: One person may not be an expert in all areas (finance, marketing, etc.).
  • Suitability: Best suited for small-scale businesses requiring personal attention, limited capital, and where risk is not extensive (e.g., retail shops, beauty parlours, clinics).

2. Joint Hindu Family (HUF) Business / Hindu Undivided Family Business

  • Meaning: A form of business organisation found only in India, governed by the Hindu Law. It comes into existence by the operation of law in a Hindu Undivided Family. Membership is by birth.
  • Features:
    • Formation: Requires at least two male members in the family and ancestral property. Governed by Hindu Succession Act, 1956.
    • Membership by Birth: Individuals become members (coparceners) by birth in the family.
    • Liability: The liability of the head of the family, the 'Karta', is unlimited. The liability of other members (coparceners) is limited to their share in the family property. (Key Distinction)
    • Control: Control lies with the Karta, the eldest male member (though recent legal changes allow females to be Karta in some situations).
    • Continuity: Business continues even after the death of the Karta, as the next eldest member takes over. More stable than sole proprietorship.
    • Minor Members: Minors can be members of the HUF business.
  • Merits:
    • Effective Control: Karta has absolute decision-making power.
    • Continued Business Existence: Stable continuity.
    • Limited Liability of Members: Coparceners' risk is limited.
    • Increased Loyalty & Cooperation: Business run by family members.
  • Limitations:
    • Limited Resources: Primarily dependent on ancestral property.
    • Unlimited Liability of Karta: Places a heavy burden on the Karta.
    • Dominance of Karta: Karta's decisions might not be acceptable to all members, potentially leading to conflicts.
    • Limited Managerial Skills: Karta may not be proficient in all aspects of management.
  • Suitability: Primarily relevant for family-owned businesses in India continuing over generations.

3. Partnership

  • Meaning: Defined by the Indian Partnership Act, 1932, 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."
  • Features:
    • Formation: Based on an agreement (oral or written) between two or more persons. A written agreement is called a Partnership Deed. Registration is optional but advisable.
    • Membership: Minimum 2 partners, Maximum 50 (as per Rule 10 of Companies (Miscellaneous) Rules 2014, prescribed by the Central Government under Sec 464 of Companies Act 2013).
    • Liability: Partners have unlimited liability, jointly and severally. They are personally liable for business debts. (Crucial Point)
    • Risk Bearing: Partners share profits and losses according to the agreed ratio (or equally if no agreement).
    • Decision Making & Control: Decisions are usually taken with mutual consent. Management responsibility is shared.
    • Continuity: Lack of continuity. Death, retirement, insolvency, or insanity of any partner can lead to dissolution of the partnership (unless otherwise provided in the deed).
    • No Separate Legal Entity: Partnership firm has no legal existence separate from its partners (except for taxation purposes under Income Tax Act).
    • Mutual Agency: Every partner is both an agent and a principal. They can bind the firm by their actions and are bound by the actions of other partners. (Important Concept)
  • Partnership Deed: A written document outlining the terms and conditions of the partnership (e.g., name of firm, nature of business, capital contribution, profit/loss sharing ratio, duties, salaries, admission/retirement rules, duration). Helps avoid disputes.
  • Types of Partners: Active, Sleeping/Dormant, Secret, Nominal, Partner by Estoppel, Partner by Holding Out. (Understand the liability implications of each).
  • Merits:
    • Ease of Formation & Closure: Relatively easy to form and dissolve compared to a company.
    • Larger Financial Resources: More capital can be raised compared to sole proprietorship.
    • Balanced Decision Making: Decisions based on consultation among partners.
    • Sharing of Risks: Risks are shared among partners.
    • Secrecy: Can maintain confidentiality better than a company.
  • Limitations:
    • Unlimited Liability: Major disadvantage.
    • Limited Resources: Capital raising capacity is less than a company.
    • Possibility of Conflicts: Disagreements among partners can arise.
    • Lack of Continuity: Uncertain future.
    • Lack of Public Confidence: Non-registration and lack of public disclosure can affect public trust.
    • Risk of Mutual Agency: Dishonest partner can bind the firm.
  • Suitability: Suitable for medium-sized businesses like professional services (CA firms, law firms), trading, and small manufacturing units where diverse skills and more capital than sole proprietorship are needed.

4. Cooperative Societies

  • Meaning: A voluntary association of persons who join together with the motive of welfare of the members, rather than profit maximization. Governed by the Cooperative Societies Act, 1912 or relevant State Cooperative Societies Acts.
  • Features:
    • Voluntary Membership: Anyone can join or leave freely based on common interest.
    • Legal Status: Registration is compulsory. It grants the society a separate legal entity, distinct from its members. (Key Difference from Partnership/Proprietorship)
    • Limited Liability: The liability of members is limited to the extent of their capital contribution. (Significant Advantage)
    • Control: Management rests with an elected Managing Committee chosen by members based on 'one member, one vote' principle, irrespective of capital contribution (Democratic control).
    • Service Motive: Primary aim is mutual help and welfare, not profit. Surplus, if any, is distributed as dividend among members as per bye-laws.
    • State Control: Subject to regulation and supervision by the government (Registrar of Cooperative Societies).
  • Types: Consumer Cooperatives, Producer Cooperatives, Marketing Cooperatives, Farmers' Cooperatives, Credit Cooperatives, Housing Cooperatives.
  • Merits:
    • Equality in Voting Status: Democratic principle ('one member, one vote').
    • Limited Liability: Protects personal assets of members.
    • Stable Existence: Perpetual succession; unaffected by entry/exit of members.
    • Economy in Operations: Focus on eliminating middlemen.
    • Support from Government: Government provides concessions, lower taxes, subsidies.
    • Ease of Formation: Relatively simpler formalities compared to a company (minimum 10 adult members required typically).
  • Limitations:
    • Limited Resources: Capital contribution from members is often limited. Low rate of return discourages large investments.
    • Inefficiency in Management: Members may not possess professional management skills; societies often cannot afford expert managers.
    • Lack of Secrecy: Open discussions in meetings and disclosure obligations to the Registrar.
    • Government Control: Excessive regulation can interfere with autonomy.
    • Differences of Opinion: Internal politics and conflicts can arise due to diverse viewpoints.
  • Suitability: Suitable for promoting the economic interests of specific groups like consumers, producers, farmers, or employees through mutual help.

5. Joint Stock Company

  • Meaning: An artificial person created by law, having a separate legal entity, perpetual succession, and a common seal. Capital is raised through transferable shares. Governed by the Companies Act, 2013.
  • Features:
    • Artificial Person: Created by law, can own property, enter contracts, sue and be sued in its own name.
    • Separate Legal Entity: Distinct identity from its owners (shareholders). (Fundamental Feature)
    • Formation: Complex and expensive process involving legal formalities (Incorporation).
    • Perpetual Succession: Existence is independent of its members. Death, insolvency, or transfer of shares by members does not affect its continuity. ('Members may come and go, but the company goes on forever').
    • Limited Liability: Liability of shareholders is limited to the nominal value of shares held by them or the amount guaranteed. (Major Advantage)
    • Transferability of Shares: Shares of a public company are freely transferable (subject to certain procedures). Private company shares have restrictions.
    • Common Seal: Official signature of the company (now optional as per Companies Amendment Act, 2015, if authorized directors sign).
    • Separation of Ownership & Management: Owned by shareholders but managed by an elected Board of Directors.
  • Types:
    • Private Company:
      • Restricts the right to transfer shares.
      • Maximum 200 members (excluding employees/ex-employees who were members).
      • Prohibits any invitation to the public to subscribe for its securities.
      • Must use "Private Limited" (Pvt. Ltd.) at the end of its name.
      • Minimum 2 members required. Minimum 2 Directors.
    • Public Company:
      • Any company which is not a private company.
      • Shares are freely transferable.
      • Can invite the public to subscribe for shares/debentures.
      • Must use "Limited" (Ltd.) at the end of its name.
      • Minimum 7 members required. Minimum 3 Directors. No maximum limit on members.
      • Requires Certificate of Commencement of Business (if incorporated after Nov 2018 and having share capital) before starting operations.
  • Merits:
    • Limited Liability: Attracts investors.
    • Transfer of Interest: Easy liquidity for shareholders (especially public companies).
    • Perpetual Existence: High stability and continuity.
    • Scope for Expansion: Can raise large amounts of capital from the public.
    • Professional Management: Can afford to hire expert managers.
  • Limitations:
    • Complexity in Formation: Lengthy, expensive, and requires many legal documents.
    • Lack of Secrecy: Must disclose information to the public and Registrar of Companies.
    • Impersonal Work Environment: Separation of ownership and management can lead to lack of personal touch and motivation.
    • Numerous Regulations: Subject to extensive legal compliance and government control.
    • Delay in Decision Making: Hierarchical structure can slow down decisions.
    • Oligarchic Management: Control often rests with a few directors, potentially ignoring minority shareholder interests.
    • Conflict of Interests: Divergence of interests among shareholders, debenture holders, directors, employees.
  • Suitability: Ideal for large-scale operations requiring huge capital investment and involving high risk.

Key Documents for Company Formation:

  • Memorandum of Association (MoA): Defines the objects and powers of the company. Contains Name clause, Registered Office clause, Objects clause, Liability clause, Capital clause. It defines the relationship of the company with outsiders. (Fundamental Document)
  • Articles of Association (AoA): Contains the rules and regulations for the internal management of the company (e.g., share allotment, calls, transfer, meetings, directors' powers). It defines the relationship between the company and its members, and among the members themselves.

Choice of Form of Business Organisation

The selection depends on various factors:

  1. Nature of Business: Personalised services (Sole Proprietorship), Professional services (Partnership), Large manufacturing (Company).
  2. Scale of Operations: Small scale (Sole Proprietorship/Partnership), Large scale (Company).
  3. Capital Requirements: Less capital (Sole Proprietorship/Partnership), Large capital (Company).
  4. Degree of Control Desired: Full control (Sole Proprietorship), Shared control (Partnership), Separation of ownership & control (Company).
  5. Liability or Risk: Willingness to bear unlimited liability (Sole Proprietorship/Partnership), Desire for limited liability (Company/Cooperative).
  6. Managerial Ability: One person's skills (Sole Proprietorship), Pooled skills (Partnership), Professional management (Company).
  7. Continuity Requirements: Need for stable, long-term existence (Company/Cooperative).
  8. Legal Formalities: Minimal formalities (Sole Proprietorship), Moderate (Partnership/Cooperative), Extensive (Company).
  9. Tax Liability: Different forms have different tax implications.

Multiple Choice Questions (MCQs)

  1. In which form of business organisation is the liability of the owner(s) unlimited?
    a) Cooperative Society
    b) Private Company
    c) Sole Proprietorship and Partnership
    d) Public Company

  2. The 'Karta' in a Joint Hindu Family business has:
    a) Limited liability
    b) Unlimited liability
    c) No liability for business debts
    d) Liability limited to his share in profits

  3. Which of the following enjoys a separate legal entity distinct from its members?
    a) Sole Proprietorship
    b) Partnership Firm
    c) Joint Stock Company
    d) Joint Hindu Family Business

  4. The principle of 'one member, one vote' is followed in:
    a) Partnership
    b) Joint Stock Company
    c) Cooperative Society
    d) Sole Proprietorship

  5. What is the maximum number of partners allowed in a partnership firm engaged in general business, as per the Companies (Miscellaneous) Rules, 2014?
    a) 10
    b) 20
    c) 50
    d) 100

  6. Which document defines the objects and powers of a Joint Stock Company?
    a) Articles of Association
    b) Partnership Deed
    c) Prospectus
    d) Memorandum of Association

  7. Transferability of shares is generally restricted in a:
    a) Public Limited Company
    b) Private Limited Company
    c) Cooperative Society
    d) Partnership

  8. The concept of 'Mutual Agency' is an important feature of:
    a) Sole Proprietorship
    b) Joint Stock Company
    c) Partnership
    d) Cooperative Society

  9. Which form of business organisation has 'Perpetual Succession' as a key feature?
    a) Sole Proprietorship
    b) Partnership
    c) Joint Stock Company
    d) All of the above

  10. Registration is compulsory for which of the following?
    a) Sole Proprietorship
    b) Partnership
    c) Joint Stock Company and Cooperative Society
    d) Joint Hindu Family Business

Answer Key for MCQs:

  1. c) Sole Proprietorship and Partnership
  2. b) Unlimited liability
  3. c) Joint Stock Company
  4. c) Cooperative Society
  5. c) 50
  6. d) Memorandum of Association
  7. b) Private Limited Company
  8. c) Partnership
  9. c) Joint Stock Company
  10. c) Joint Stock Company and Cooperative Society

Remember to revise these concepts thoroughly, focusing on the distinctions, especially regarding liability, legal status, continuity, and capital contribution. Good luck with your preparation!

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