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This chapter discusses the choice of business organisation form based on advantages and disadvantages. It covers sole proprietorship, joint Hindu family business, partnership, cooperative societies, and joint stock companies. These notes summarise key concepts from Chapter 2 of the NCERT textbook Business Studies for effective revision. You can also download the free PDF for quick reference.
Contents
- 1 Introduction
- 2 Sole Proprietorship
- 3 Joint Hindu Family Business
- 4 Partnership
- 5 Types of Partners
- 6 Types of Partnerships
- 7 Partnership Deed
- 8 Registration
- 9 Cooperative Society
- 10 Joint Stock Company
- 11 Choice of Form of Business Organisation
- 12 Important Definitions in NCERT Notes Class 11 Business Studies Chapter 2: Forms of Business Organisation
- 13 FAQs
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Introduction
The choice of business organisation form is important for starting or expanding a business. It is determined by weighing advantages and disadvantages against requirements. Forms include sole proprietorship, joint Hindu family business, partnership, cooperative societies, and joint stock company.
* Planning to start or expand a business requires a decision on the form of organisation.
* Appropriate form by comparing merits and demerits with own needs.
* Forms: (a) Sole proprietorship, (b) Joint Hindu family business, (c) Partnership, (d) Cooperative societies, (e) Joint stock company.
* Discussion starts with sole proprietorship, then complex forms.
Sole Proprietorship
A sole proprietorship is owned, managed, and controlled by one individual who bears all risks and receives all profits. It is suitable for small businesses, especially initial years, like neighbourhood stationery stores, beauty parlours, hair salons, and retail shops.
- Form where the individual is the recipient of all profits and bearer of all risks.
- “Sole” means only, “proprietor” means owner.
- Common in personalised services and small-scale activities.
Features
Here are the features of a sole proprietorship:
(i) Formation and closure: No separate law; minimal legal formalities, license in some cases; easy start and closure.
(ii) Liability: Unlimited; personal assets sold if business assets are insufficient.
(iii) Sole risk bearer and profit recipient: Bears all failure risks; enjoys all profits as reward.
(iv) Control: Absolute decision-making with no interference.
(v) No separate entity: No legal distinction between owner and business; owner is responsible for all activities.
(vi) Lack of business continuity: Affected by death, insanity, imprisonment, ailment, bankruptcy of proprietor; may cause closure.
Merits
Here are the merits of sole proprietorship:
(i) Quick decision making: Freedom in decisions; prompt, capitalises opportunities.
(ii) Confidentiality of information: Keeps operations secret; not legally bound to publish accounts.
(iii) Direct incentive: Sole recipient of profits; maximum incentive to work hard.
(iv) Sense of accomplishment: Personal satisfaction; instils confidence.
(v) Ease of formation and closure: Minimal formalities; least regulated.
Limitations
Here are the limitations of sole proprietorship:
(i) Limited resources: Personal savings, borrowings; banks hesitate to offer long-term loans; size remains small.
(ii) Limited life: Affected by the proprietor’s death, insanity, etc.; leads to closure.
(iii) Unlimited liability: Creditors claim personal assets; discourages risk-taking.
(iv) Limited managerial ability: Handles all tasks; rare expertise in all; hard to retain talent.
Joint Hindu Family Business
Found only in India; the oldest form; owned and carried by Hindu Undivided Family members; governed by Hindu Law. Membership by birth; three successive generations; controlled by karta (eldest); co-parceners have equal rights over ancestral property.
- Specific to India, governed by Hindu Law.
- Basis of membership: birth in the family.
- Karta: head, eldest member.
- Co-parceners: members with ownership rights.
Features
Here are the features of the Joint Hindu Family Business:
(i) Formation: At least two members, ancestral property; no agreement; governed by the Hindu Succession Act, 1956.
(ii) Liability: Co-parceners limited to share; karta unlimited.
(iii) Control: With karta, decisions are binding.
(iv) Continuity: Continues after karta’s death; the next eldest becomes karta; terminated by mutual consent.
(v) Minor Members: Minors can be members by birth.
Merits
Here are the merits of the Joint Hindu Family Business:
(i) Effective control: Karta’s absolute power; avoids conflicts; prompt decisions.
(ii) Continued business existence: Not affected by karta’s death.
(iii) Limited liability of members: Co-parceners’ risk is defined to be shared.
(iv) Increased loyalty and cooperation: Family members, pride in growth.
Limitations
Here are the limitations of the Joint Hindu Family Business:
(i) Limited resources: Depends on ancestral property; limits expansion.
(ii) Unlimited liability of karta: Personal property at risk.
(iii) Dominance of karta: May cause conflicts; breakdown of family.
(iv) Limited managerial skills: Karta may lack expertise, poor profits.
Partnership
A relation where persons agree to share profits of a business carried on by all or any acting for all; per the Indian Partnership Act, 1932. Answers are needed for capital, skills, and risk sharing.
- Definition: A Relation between persons agreeing to share profits; business by all or any for all.
- Viable for greater investment, varied skills, and risk sharing.
Features
Here are the features of the Partnership:
(i) Formation: Legal agreement on terms; lawful business for profit; governed by the 1932 Act.
(ii) Liability: Unlimited; joint and individual; personal assets used.
(iii) Risk bearing: Shared in an agreed ratio.
(iv) Decision making and control: Shared; mutual consent; joint efforts.
(v) Continuity: Ends with death, retirement, insolvency, or insanity; new agreement possible.
(vi) Number of Partners: Minimum 2; maximum 100, presently 50 per rules.
(vii) Mutual agency: Each partner agent and principal binds others.
Merits
Here are the merits of the Partnership:
(i) Ease of formation and closure: Agreement; no compulsory registration.
(ii) Balanced decision making: Expertise areas; fewer errors.
(iii) More funds: Combined capital.
(iv) Sharing of risks: Reduces individual burden.
(v) Secrecy: No legal publication of accounts.
Limitations
Here are the limitations of the Partnership:
(i) Unlimited liability: Joint and several; wealthy partners bear more.
(ii) Limited resources: Partner limit; insufficient for large operations.
(iii) Possibility of conflicts: Differences in opinion; unwise decisions bind all.
(iv) Lack of continuity: Affected by partner changes.
(v) Lack of public confidence: No public financial reports.
Types of Partners
There are various types of partners for business organisations. Here, we have mentioned the types of business partners:
(i) Active partner: Contributes capital, manages, shares profits/losses, unlimited liability.
(ii) Sleeping or dormant partner: Contributes capital, shares profits/losses, unlimited liability; no day-to-day.
(iii) Secret partner: Association unknown; contributes, manages, shares, unlimited liability.
(iv) Nominal partner: Lends name; no capital, management, profits; liable to third parties.
(v) Partner by estoppel: Gives the impression of being a partner; liable though no contribution.
(vi) Partner by holding out: Represented as partner; liable unless denial issued.
Types of Partnerships
Partnership is divided into two categories: Duration and Liability. Here we have defined the terms within them.
- On duration: (i) Partnership at will: Continues till notice of withdrawal. (ii) Particular partnership: For a specific project or time; dissolves on completion/expiry.
- On liability: (i) General Partnership: Unlimited, joint; management rights; optional registration; affected by partner changes. (ii) Limited Partnership: One unlimited, others limited; compulsory registration; not affected by limited partners’ changes; no management for limited.
Partnership Deed
Written agreement specifying terms; includes name, nature, duration, investment, profit sharing, duties, salaries, admission/retirement, interest, dissolution, accounts, disputes. Oral possible, but written advisable.
Registration
Optional: entry in Registrar of Firms; proof of existence. Non-registration: no suit against firm/partners, no suit by firm against third parties/partners. Procedure: Application with particulars, fees; Registrar approves, issues certificate.
Cooperative Society
Voluntary association for members’ welfare; protects from middlemen exploitation; registered under the Cooperative Societies Act 1912.
- Motive: Welfare, mutual help.
- Driven by economic interest protection.
Features
Here are the features of the Cooperative Society:
(i) Voluntary membership: Free to join/leave; open to all.
(ii) Legal status: Compulsory registration; separate identity; contracts, property in name.
(iii) Limited liability: To capital contributed.
(iv) Control: Elected managing committee; one man, one vote.
(v) Service motive: Emphasis on mutual help; surplus as dividend per bye-laws.
Merits
Here are the merits of the Cooperative Society:
(i) Equality in voting status: One member, one vote.
(ii) Limited liability: Personal assets are safe.
(iii) Stable existence: Unaffected by member changes.
(iv) Economy in operations: Honorary services; no middlemen; low bad debts.
(v) Support from government: Low taxes, subsidies, loans.
(vi) Ease of formation: Simple formalities.
Limitations
Here are the limitations of the Cooperative Society:
(i) Limited resources: Members’ contributions; low dividend deters.
(ii) Inefficiency in management: Unable to pay high salaries; voluntary members lack skills.
(iii) Lack of secrecy: Open discussions, disclosures.
(iv) Government control: Compliance with rules; interference.
(v) Differences of opinion: Quarrels; personal interests dominate.
Types of Cooperative Societies
There are different types of Cooperative Societies in the business world. Below, we have listed and defined a few of them:
(i) Consumers: Protect consumers; bulk purchase, sell to members; profits on contributions/purchases.
(ii) Producers: For small producers, supply inputs, buy output; profits on contributions.
(iii) Marketing: Help sell products; pool output, marketing functions; profits on contribution.
(iv) Farmers: Better inputs; large-scale benefits; seeds, fertilisers, machinery.
(v) Credit: Easy loans; low interest; from members’ capital/deposits.
(vi) Cooperative housing: Houses at low cost; instalments; flats/plots.
Also Read: NCERT Notes Class 11 English Hornbill Poem 4: Childhood (Free PDF)
Joint Stock Company
Association for business; separate legal entity, perpetual succession, common seal; governed by the Companies Act, 2013. Shareholders are owners; the Board of Directors manage; shares are transferable (except private).
- Artificial person; independent existence.
- Capital in shares.
Features
Here are the features of the Joint Stock Company:
(i) Artificial person: Creation of law; owns property, contracts; no physical acts.
(ii) Separate legal entity: Distinct from members; owns assets/liabilities.
(iii) Formation: Time-consuming, expensive; documents, legal compliance; compulsory incorporation.
(iv) Perpetual succession: Ends only by law; members change, company continues.
(v) Control: Board of Directors; appoint top management; shareholders indirectly.
(vi) Liability: Limited to the unpaid share amount.
(vii) Risk bearing: Shared by all shareholders.
Merits
Here are the merits of the Joint Stock Company:
(i) Limited liability: To unpaid shares; personal property safe.
(ii) Transfer of interest: Shares sold easily (public).
(iii) Perpetual existence: Unaffected by member changes.
(iv) Scope for expansion: Large resources; public shares, loans.
(v) Professional management: Experts; division of work.
Limitations
Here are the limitations of the Joint Stock Company:
(i) Complexity in formation: Lengthy, costly procedures.
(ii) Lack of secrecy: Information to the registrar, public.
(iii) Impersonal work environment: Separation of ownership-management; lack of contact.
(iv) Numerous regulations: Legal compulsions; audits, reports.
(v) Delay in decision making: Hierarchical; approvals cause delays.
(vi) Oligarchic management: Directors dominate; shareholders have minimal influence.
(vii) Conflict of interest: Among stakeholders.
Types of Companies
There are two types of companies: Private and Public. These companies are defined below:
- Private Company: Restricts share transfer; 2-200 members (excluding employees); no public invitation; “private limited”. Privileges: 2 members, no prospectus, start on incorporation, 2 directors.
- Public Company: Not private; minimum 7, no max; free transfer; public invitation. A subsidiary of the public is public.
Choice of Form of Business Organisation
Business Organisation can be selected by considering various factors. These factors include cost/ease, liability, continuity, management ability, capital, control, and nature of business.
- Sole: Low cost, unlimited liability, affected continuity, limited management, small capital, direct control, personal contact.
- Partnership: Less formalities, unlimited, affected, division, combined, shared, professional services. ]
- Company: High cost, limited, stable, professional, large, separated, large manufacturing.
Important Definitions in NCERT Notes Class 11 Business Studies Chapter 2: Forms of Business Organisation
This section lists key terms for clarity and revision:
- Sole Proprietorship: Form owned, managed, and controlled by one individual bearing all risks and profits.
- Joint Hindu Family Business: Owned by HUF members; governed by Hindu Law; karta controls.
- Partnership: A Relation agreeing to share profits; business by all or any for all.
- Cooperative Society: Voluntary association for members’ welfare; service motive.
- Joint Stock Company: Artificial person; separate entity, perpetual succession, common seal.
- Karta: The Eldest member controlling the joint Hindu family business.
- Co-parceners: Members with equal rights over ancestral property.
- Partnership Deed: Written agreement on partnership terms.
- Mutual Agency: Partner as agent and principal.
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FAQs
A sole proprietorship is a business owned, managed, and controlled by one individual who bears all risks and enjoys all profits. Key feature: unlimited liability, personal assets are liable for debts.
The karta, the eldest family member, controls the business. He has unlimited liability, while co-parceners’ liability is limited to their share in the ancestral property.
Mutual agency means every partner is both agent and principal; can bind others by acts, and is bound by others’ acts in business operations.
A cooperative has a service motive, voluntary membership, one member one vote, limited liability; a company has a profit motive, a separate legal entity, professional management, share-based capital.
The company offers limited liability, perpetual succession, large capital through shares, professional management, and easy transferability, suitable for expansion and risk distribution.
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