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The NCERT Class 11 Business Studies Chapter 2 explores different forms of business organisations, including sole proprietorship, joint Hindu family business, partnership, cooperative societies, and joint stock companies. It covers their features, merits, limitations, types (where applicable), and factors influencing the choice of an appropriate form. These solutions provide clear, concise, and CBSE-aligned answers for effective exam preparation. You can also download the free PDF for revision.
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NCERT Solutions Class 11 Business Studies Chapter 2: Forms of Business Organisation
This section provides detailed and student-friendly answers for the Class 11 Business Studies Chapter 2 exercise questions. Each answer is explained clearly to strengthen understanding and exam preparation.
Exercise
Short Answer Questions:
1. Compare the status of a minor in a Joint Hindu Family Business with that in a partnership firm.
In a Joint Hindu Family Business, a minor can become a full-fledged member (coparcener) by birth, enjoying equal rights in the ancestral property along with other members, though they do not participate in management until adulthood. Their liability is limited to their share in the family property. In contrast, in a partnership firm, a minor cannot be a full partner but can be admitted only to the benefits of the partnership with the consent of all adult partners. They share profits but not losses, and their liability is limited to their investment. Upon reaching majority, the minor can choose to become a full partner or withdraw.
2. If registration is optional, why do partnership firms willingly go through this legal formality and get themselves registered? Explain.
Although registration of a partnership firm is optional under the Indian Partnership Act, 1932, firms often choose to register to gain legal benefits. A registered firm can file suits against third parties for recovery of dues, while an unregistered firm cannot. Partners in a registered firm can also sue each other or the firm for enforcement of rights. Registration provides a public record of the firm’s existence, enhancing credibility with banks, creditors, and customers. It offers legal proof of the partnership agreement, terms, and partners’ details, preventing disputes. Overall, registration provides legal protection, credibility, and access to remedies that unregistered firms lack.
3. State the important privileges available to a private company.
A private company enjoys several privileges compared to a public company: (i) It can be formed with a minimum of 2 members (versus 7 for a public company). (ii) It does not need to issue a prospectus or obtain a certificate of commencement before starting business. (iii) It can allot shares without waiting for the minimum subscription. (iv) It has fewer restrictions on loans to directors and does not require statutory meetings or filing of reports with the Registrar. (v) It can start business immediately after incorporation, with relaxed disclosure requirements, maintaining greater privacy.
4. How does a cooperative society exemplify democracy and secularism? Explain.
A cooperative society exemplifies democracy through its ‘one member, one vote’ principle, ensuring equal voting rights regardless of capital contribution, and democratic management via an elected managing committee accountable to members. Decisions are made collectively in general meetings. It exemplifies secularism by being open to all individuals without discrimination based on caste, religion, gender, or political affiliation. Membership is voluntary and based on common economic interests, promoting unity and equality among diverse groups.
5. What is meant by ‘partner by estoppel’? Explain.
A ‘partner by estoppel’ refers to a person who, through their words, conduct, or behaviour, gives the impression to outsiders that they are a partner in the firm, even though they are not. Such a person is estopped (prevented) from denying their partnership status later and becomes liable to third parties who acted on that belief. For example, if someone allows their name to be used in firm communications or does not correct misconceptions about their involvement, they can be held liable as a partner for the firm’s debts to innocent third parties.
6. Explain the following terms in brief.
(a) Perpetual succession
Perpetual succession means the company continues to exist indefinitely, unaffected by the death, retirement, or insolvency of its members or directors. The company’s life is independent of its owners, ensuring continuity until legally dissolved.
(b) Common seal
The common seal is the official signature of a company, engraved with its name, used to authenticate important documents like contracts and share certificates. It acts as the company’s ‘signature’ since the company is an artificial person without a physical form.
(c) Karta
Karta is the eldest male member of a Joint Hindu Family Business who manages and controls the business with absolute authority. Their decisions bind all members, and they have unlimited liability, while ensuring the family’s interests.
(d) Artificial person
An artificial person refers to a company, which is created by law and has a separate legal identity from its members. It can own property, sue or be sued, enter into contracts, but lacks a physical body or natural life, relying on representatives for actions.
Long Answer Questions:
1. What do you understand by a sole proprietorship firm? Explain its merits and limitations?
A sole proprietorship firm is a business owned, managed, and controlled by a single individual who bears all risks and receives all profits. It is the simplest form, common in small-scale operations like retail shops or services. Merits include: quick decision-making without consultation; direct incentives as the owner keeps all profits; confidentiality of business information; sense of accomplishment from personal success; and ease of formation/closure with minimal legal formalities. Limitations include: limited resources restricting growth; limited managerial skills as one person handles everything; unlimited liability exposing personal assets to business debts; lack of continuity if the owner dies or becomes incapacitated; and inability to attract top talent due to small scale.
2. Why is partnership considered by some to be a relatively unpopular form of business ownership? Explain the merits and limitations of partnership.
Partnership is sometimes unpopular due to unlimited liability, potential conflicts among partners, limited capital compared to companies, and risk of dissolution from disagreements or partner withdrawal. Merits include: easy formation with a simple agreement; larger resources from multiple contributors; balanced decision-making through diverse skills; risk sharing, reducing individual burden; flexibility in operations; and protection for minority interests via mutual consent requirements. Limitations include: unlimited liability risking personal assets; possibility of conflicts leading to inefficiency; limited capital hindering large-scale operations; lack of continuity upon partner death or exit (unless specified otherwise); and restricted public confidence due to no public accounts.
3. Why is it important to choose an appropriate form of organisation? Discuss the factors that determine the choice of form of organisation.
Choosing an appropriate form is crucial as it affects capital availability, liability, control, continuity, and growth potential. A wrong choice can lead to inefficiencies, legal issues, or failure. Factors determining choice include: (i) Cost and ease of formation, sole proprietorship is simplest; (ii) Liability, limited in companies, unlimited in sole proprietorship/partnership; (iii) Continuity, perpetual in companies/cooperatives; (iv) Management ability, partnerships offer diverse skills; (v) Capital requirements, companies suit large needs; (vi) Control, sole proprietorship for full control; (vii) Nature of business, services suit sole proprietorship, manufacturing may need companies; and (viii) Degree of risk, low-risk prefers limited liability forms.
4. Discuss the characteristics, merits and limitations of a cooperative form of organisation. Also, describe the different types of cooperative societies briefly.
Characteristics of cooperative societies include: voluntary membership open to all; democratic management with one vote per member; service motive over profit; separate legal entity; and state regulation for accountability. Merits: equality in voting; limited liability to share capital; stable existence; economies of scale through bulk purchasing; and surplus distribution based on participation. Limitations: limited resources from member contributions; inefficiencies in management due to elected amateurs; lack of secrecy in open discussions; and government interference. Types: (i) Consumer cooperative, buys goods in bulk for members at low prices; (ii) Producer cooperative, helps small producers pool resources for production/marketing; (iii) Marketing cooperative, assists in selling members’ produce; (iv) Farmers cooperative, collective farming for better yields; (v) Credit cooperative, provides low-interest loans; (vi) Housing cooperative, offers affordable housing/plots.
5. Distinguish between a Joint Hindu family business and a partnership.
Joint Hindu family business is governed by Hindu law, membership by birth (coparceners), managed solely by Karta with unlimited liability (others limited), no maximum members, perpetual continuity, no registration needed, and minors are full members. Partnership is governed by the Indian Partnership Act, 1932, formed by agreement; all partners have unlimited liability, a maximum of 50 members, continuity depends on agreement, registration is optional but beneficial, and minors can only share benefits. A joint Hindu family is family-centric and ancestral, while a partnership is contractual and flexible.
6. Despite limitations of size and resources, many people continue to prefer sole proprietorship over other forms of organisation. Why?
People prefer sole proprietorship despite limitations because of ease of formation and closure with no complex legalities; full control and quick decisions without interference; direct profit retention as an incentive; confidentiality of operations; personal touch in customer relations; low startup costs; flexibility to adapt quickly; and suitability for small, localised businesses like shops or services where personal involvement is key. It offers independence and self-employment, appealing to entrepreneurs starting small.
Application Type Questions:
1. In which form of organisation is a trade agreement made by one owner binding on the others? Give reasons to support your answer.
In a partnership firm, a trade agreement made by one partner is binding on others because partners are agents of the firm and each other (mutual agency). Actions within the business scope bind all, as per the Indian Partnership Act, 1932. This ensures smooth operations but requires trust. In contrast, in a sole proprietorship, only the owner binds themselves; in companies, directors bind the company but not personal members.
2. The business assets of an organisation amount to Rs. 50,000, but the debts that remain unpaid are Rs. 80,000. What course of action can the creditors take if
(a) The organisation is a sole proprietorship firm
Creditors can recover from business assets (Rs. 50,000) and then from the proprietor’s personal assets (e.g., house, car) for the remaining Rs. 30,000, due to unlimited liability.
(b) The organisation is a partnership firm with Anthony and Akbar as partners. Which of the two partners can the creditors approach for repayment of the debt? Explain, giving reasons.
Creditors can approach either Anthony or Akbar or both, as partners have unlimited, joint, and several liability. They can recover from firm assets first, then personal assets of any partner, even if one pays more, they can later adjust internally.
3. Neha is a sole proprietor. Over the past decade, her business has grown from operating a neighbourhood corner shop selling accessories such as artificial jewellery, bags, hair clips and nail art to a retail chain with three branches in the city. Although she looks after the varied functions in all the branches, she wonders whether she should form a company to manage the business better. She also has plans to open branches countrywide.
(a) Explain two benefits of remaining a sole proprietor
Remaining a sole proprietor allows full control and quick decisions without sharing authority, and direct profit retention as an incentive for hard work.
(b) Explain two benefits of converting to a joint stock company
Converting to a company provides limited liability, protects personal assets, and provides access to large capital through shares for nationwide expansion.
(c) What role will her decision to go nationwide play in her choice of form of the organisation?
Nationwide expansion requires large capital, professional management, and risk distribution, making a company form suitable over sole proprietorship, which limits resources and scale.
(d) What legal formalities will she have to undergo to operate the business as a company?
She must incorporate under the Companies Act, 2013: prepare Memorandum and Articles of Association, file with Registrar, obtain Certificate of Incorporation, issue prospectus (if public), get Certificate of Commencement, and comply with SEBI/stock exchange norms for raising capital.
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