Detailed, Step-by-Step NCERT Solutions for 11 Business Studies Chapter 2 Forms of Business Organisation Questions and Answers were solved by Expert Teachers as per NCERT (CBSE) Book guidelines covering each topic in chapter to ensure complete preparation.
Forms of Business Organisation NCERT Solutions for Class 11 Business Studies Chapter 2
Forms of Business Organisation Questions and Answers Class 11 Business Studies Chapter 2
Tick the appropriate answer :
The structure in which there is the separation of ownership and management is called
(a) Sole Proprietorship
(d) All business organizations
The Karta in Join Hindu Family -business has
(a) Limited liability
(b) Unlimited liability
(c) No liability for debts
(d) Joint liability
(b) Unlimited liability
In a cooperative society the principle followed is
(a) One share one vote
(b) One man one vote
(c) No vote
(d) Multiple vote
(b) One man one vote
The board of directors of a joint stock company is elected by
(a) General public
(b) Government bodies
The maximum number of partners allowed’in the banking business are ………….
(c) No limit
Profits do not have to be shared. This statement refers to
(b) Joint Hindu Family business
(c) Sole Proprietorship
(c) Sole Proprietorship
The capital of a company is divided into number of parts each one of which are called
The Head of the Joint Hindu Family business is called
Provision of residential accommodation to the members at reasonable rates is the objective of
(a) Producer’s Cooperative
(b) Consumer’s Cooperate
(c) Housing Cooperative
(d) Credit Cooperation
(c) Housing Cooperative
A partner whose association with the firm is unknown to the general public is called
(a) Active Partner
(b) Sleeping Partner
(c) Nominal Partner
(d) Secret Partner
(d) Secret Partner
Short Answer Questions
For which of the following types of business do you think a sole proprietorship form of organisation would be more suitable and why?
(a) Grocery store
(b) Medical store
(c) Legal consultancy
(d) Craft centre
(e) Internet cafe
(f) Chartered accountancy firm
(a) Grocery store – For grocery’ store, sole proprietorship is suitable form of business as it does not require large capital, lire individual management is required to run the store. It does not require professional skills and the business needs personal touch and control with customers and no legal formalities required to start the business.
(b) Medical store – It is suitable for sole proprietorship as it does not need any legal formalities to start the business except to obtain licence from medical association. It does not require huge amount of capital and no professional management is needed.
(c) Chartered accountancy firm – Sole proprietorship is suitable firm of business as it needs personal contact with the firms or customers, having technical knowledge, skill and professional degree are required.
For which of the following types of business do you think a partnership form of organisation would be more suitable, and why?
(a) Grocery store
(b) Medical clinic
(c) Legal consultancy
(d) Craft centre
(e) Internet cafe
(f) Chartered accountancy firm
(a) Legal consultancy – For legal consultancy, partnership form of business is suitable as it needs large volume of capital. Partners can accomplished different functions according to the area or division. The accounts are not published so it has more secrecy also.
(b) Craft centre- For craft centre also, partnership firm is suitable as more financial resources are required. In craft Centre, partners may divide the work according to the suitability of the partner.
(c) Internet cafe – In internet cafe, both sole proprietorship or partnership firm are suitable, but it will be more profitable in partnership as it require large amount of capital and to some extent involves risk also which will be shared among the partners.
Explain the following terms in brief.
- Perpetual succession
- Common seal
- Artificial person.
1. Perpetual succession:
A company is a legal entity separate from its owners or members. It can be brought to an end only by law as it is created by the law. It will only cease to exist when a specific procedure for its closure, called winding up, is completed.
Members may come and go, but the company continues to exist through a consecutive succession of old members by new members on a continuous basis. We can say that ‘perpetual succession’ implies permanent existence which is not affected by death, retirement insolvency of members.
2. Common Seal:
A company is a creation of law and exists independent of its members. The company is thus considered to be an artificial person who acts through its Board of Directors. When the Board of Directors enters into an agreement with others, it indicates the company’s approval through a common seal.
The common seal is the engraved equivalent of an official signature. Any agreement which does not have the company seal put on it is not legally binding on the company.
The head of the Joint Hindu Family who is the eldest member and controls the Joint Hindu Family business which is a specific form of business organization found only in India is called Karta. Joint Hindu Family business 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 Hindu Law. The control of the family business lies with the Karta. He takes all the decisions and is authorized to manage the business. His decisions are binding on the other members. The Karta has unlimited liability while the liability of all other members is limited to their share of coparcenary property of the business.
4. Artificial Person:
A company is called an artificial person because just like natural persons, a company can own property, incur debts, borrow money, enter into contracts, sue, and be sued but unlike them, it cannot breathe, talk, walk, eat, etc. A company is a creation of law and exists as an artificial person independent of its members.
Compare the status of a minor In a Joint Hindu Family business with that in a partnership firm.
When the inclusion of an individual into the business occurs due to the birth in the Hindu Undivided Family (HUF) is known as Minor. On the other hand, the partnership is based on a legal contract between two persons who agree to share the profits or losses of a business carried on by them and a minor is incompetent to enter into such a valid contract with others. Hence, a minor cannot become a partner in any firm. However, a minor can be admitted to the benefits of a partnership firm with the mutual consent of all other partners.
If registration is optional, why do partnership firm willingly go through this legal formality and get themselves registered? Explain.
Registration of Partnership – Under law, it is not compulsory to get the partnership firm registered. It is optional for the partners to get their firm registered. If they so desire, they can get their firm registered with the Registrar of Firms of the relevant State. The registration of a firm is a simple process. In order to get registered, a firm must submit an application to the Registrar of firms containing the followings:
- the firm name
- the principal place of business
- the names of other places where firm carries on business;
- the date when each partner joined the firm;
- the names and addresses of the partners; and
- the duration of the firm.
The application must be duly signed by all the partners and should be accompanied by the partnership deed and the necessary registration fee. After being satisfied, the Registrar of Firms will enter the name of the firm in the Register of Firms and will issue a Registration Certificate to the firm.
Consequences of Non-registration – A partnership arises out of an agreement between two or more persons and not out of registration. Registration provides only a reliable evidence and a conclusive proof of the existence of a partnership firm. Non-registration of a firm does not make the partnership agreement or any transaction between the partners and outsiders void. However, according to Sec. 69 of the Partnership Act, the consequences of non-registration are as follows :
- It cannot enforce its claim against a third party in a court of law.
- Partners of unregistered firms cannot sue the firm to enforce their claims.
- An unregistered firm cannot file a suit against a third party for the recovery of claims. It cannot claim a set-off in a suit filed against it.
- An unregistered firm can’t file a suit against any of its partners.
Because of the above disabilities due to non-registration, it is desirable to get the firm registered. The registered firm and its partners will have the rights to file suits mentioned above. Another effect of registration is that any statement, intimation or notice recorded in the Register of Firms is a conclusive proof of the facts stated there in.
Advantages of Registration:
The advantages of registration of a firm are as follows:
- Partners of a registered firm can file suits against the firm to enforce their rights.
- Partners can file suits against each other and against outsides.
- The firm can file a suit against any of its partners to enforce its rights in a court of law.
- The firm can enforce its claim against third parties in a court of law. It can also claim a set-off in a suit filed against it.
- Third parties can obtain information about the firm and its partners from the Registrar of Firms before dealing with it.
- A person intending to join as a partner can obtain necessary information from the Registrar of firms.
State the important privileges available to a private company.
The following are some of the privileges of a private limited company as compared to a public limited company
- The minimum number of members required to form a private company is only two while at least seven people are needed to form a public company.
- A private company does not need to issue a prospectus as the public is not invited to subscribe to its shares.
- Allotment of shares can be done without receiving the minimum subscription.
- A private company can start a business as soon as it receives the certificate of incorporation and does not have to wait for the receipt of a certificate of commencement as in the case of a public company.
- A private company needs to have only two directors as against the minimum of three directors in the case of a public company.
- A private company is not required to keep an index of members unlike a public company
- There is no restriction on the number of loans to directors in a private company while in the case of public company permission from the government is required.
How does a cooperative society exemplify democracy and secularism? Explain.
Cooperative is an association of persons usually of limited means, who have voluntarily joined together to achieve a common economic end through the formation of a democratically controlled business organizations. Cooperative societies enjoy the various advantages specially democracy and secularism.
Democratic Management – Every member has one vote irrespective of the amount of shares subscribed by him. The principle of “one vote one man” is followed. Office bearers are the elected , representative of the members.
Secularism Principle – A person having common interest may join and leave the society at his own will. Membership is open irrespective of religion, caste and sex. Mutual cooperation, distributive justice, decentralization of power, open membership makes cooperative societies asocial utility.
What is meant by ‘Partner of Estoppel’. Explain.
A partner by estoppel is a person who gives an impression to others that he/she is a partner of the firm through his / her own initiative, conduct, or behavior. Such partners are held liable for the debts of the firm because in the eyes of others, they are considered partners, even though they do not contribute capital or take part in its management, e.g., Mr. Sharma is a friend of Mr. Mathur who is a partner in a pharmaceutical firm Health First.
On Mr. Mathur’s request, Mr. Sharma accompanies him to a business meeting with Wellness Pharmaceuticals and actively participates in the process of negotiation for a business deal and gives the impression that he is also a partner in Health First. If credit is extended to Health First on the basis of these negotiations, Mr. Sharma would also be liable for repayment of such debt, as if he is acting as the partner of the firm.
Long Answer Questions
What do you understand by sole proprietorship? Explain its merits and limitations. .
Sole proprietorship refers to a form of business organization which is owned, managed and controlled by an individual who is the incipient of all profits and bearer of all risks. The word “Sole’’ implies “only” and “proprietor” refers to “owner”. Hence, a sole proprietor is the only owner of a business. This form of business is particularly common in small-scale businesses and areas of personalized services.
A sole proprietorship offers many advantages. Some of the important ones are as follows:
(i) Quick decision making:
A sole proprietor enjoys a 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.
(ii) Confidentiality of information:
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 a firm’s accounts.
(iii) 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 as he/she is the single owner. This provides a maximum incentive to the sole trader to work hard.
(iv) Sense of accomplishment:
There is 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 instills in the individual a sense of accomplishment and confidence in one’s abilities.
(v) 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.
Notwithstanding various advantages, the sole proprietorship form of organization is not free from limitations. Some of the major limitations of sole proprietorship are as follows:
(i) Limited resources:
Resources of a sole proprietor are limited to his/her personal savings and 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.
(ii) Limited life of a business concern:
In the eyes of the law, the proprietorship and the owner are considered one and the same. Death, insolvency or illness of a proprietor affects the business and can lead to its closure.
(iii) Unlimited liability:
A major disadvantage of a 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 unfavourable circumstances can create a serious financial burden on the owners. That is why a sole proprietor is less inclined to take risks in the form of innovation or expansion.
(iv) 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 cases. Also, due to limited resources, sole proprietors may not be able to employ and retain talented and ambitious employees.
Though sole proprietorship suffers from various shortcomings, many entrepreneurs opt for this form of organisation because of its inherent advantages. It requires less amount of capital. It is best suited for businesses which are carried out on a small scale and where customers demand personalised services.
Why is partnership considered by some to be a relatively unpopular form of business ownership? Explain the merits and limitations of partnership.
Advantages of Partnership – Along with sold proprietorship, partnership firm also gained popularity because of many advantages. Partnership allows raising more amount of capital. The strains on the sole proprietor can be relieved by sharing the work between two or more partners.
Each partner can look after those matters for which he is best fitted. This will lead to benefits of specialisation. The partners can consult each other and they can represent other partners in dealings with third parties. The fear of discontinuance of business is less as compared to sole tradership because of a number of partners who can take care’of the business in case of ill-health, insolvency, insanity or death of a partner.
The partnership firm has greater chances of survival as it can operate in a number of business lines to secure its interests. It can raise more funds because of the personal reputation of the partners.
As compared with a sole, leadership and company, the advantages of a partnership firm are discussed below :
(i) Ease of Formation – Partnership is simple to form, inexpensive to establish and easy to operate. No legal formalities are required. An agreement, which may be oral or written, is sufficient to enter into partnership. Registration of the firm is not compulsory. But if a firm wants to get itself registered, the procedure is very simple.
(ii) Large Financial Resources – A partnership firm can raise larger capital as compared to sole trader. All the partners contribute to the capital of the firm. Moreover, new partner can be admitted to raise further capital of firm whenever necessary.
(iii) Better Management – A firm can conduct business on a large scale. It can afford to employ competent managers. Moreover, the partners also bring managerial skills for the business of the firm. Thus, the business is managed better as compared to sole tradership.
(iv) Better Decisions – Two heads are always better than one. This principle applies to partnership firms. The important decisions are taken with the mutual consent of all the partners.
(v) Sharing of Risks – The risks of the firm’s business are shared by a number of partners. The burden of risks on each partner is much less as compared to a sole proprietor.
(vi) Flexibility – Partnership business is free from legal restrictions and government control. Partners can make changes m the size of business, capital and managerial structure without any approval. Capital, profit-sharing ratio, price policy and other terms and conditions of the partnership can be changed very easily.
(vii) Matching of Ownership and Capital – The skill and experience of all the partners are pooled together. Moreover, there is a relationship between the efforts and rewards as in case of a sole trader. This acts as a motivating factor for the partners to work hard for the success of the business.
(viii) Impact of Unlimited Liability – The partners are severally and jointly liable for the debts of the firm up to an unlimited extent. This compels them to conduct business carefully. This acts as a brake on hasty and reckless decisions. Each partner tends to be cautious and adopts sound business practices in the interest of the partnership business.
(ix) Secrecy – Important secrets of a partnership firm can be maintained as it is not compulsory for it to get its accounts audited and published.
(x) Easy Dissolution – Partnership business suffers from instability, insolvency, insanity, retirement or death of a partner may cause abrupt end to business. There are no legal hurdles involved in dissolution. This helps in protection of minority interest. If a partner feels that his interests are not secured in the firm, he cannot be compelled by the majority partners to remain in the business. He can demand dissolution of the partnership firm.
Limitations or Disadvantages of Partnership – The partnership form of organisation suffers from the following disadvantages:
(i) Limited Resources – There is a limit to the maximum number of partners in a firm. Therefore, it is not possible to collect huge financial resources. Blowing capacity of partners is also limited.
(ii) Unlimited Liability- Every partner is fully liable for the debts. Fear of risks may restrict initiative and growth of business. Private properties of partners can also be taken up for business losses.
(iii) Mutual Conflicts – All the partners can participate in the management of the business. But difference in their skills, capacity and foresightedness may make a ‘mess’ of the business of the firm.
(iv) Delay in Decision-making – The consent of all the partners is required in order to take all policy decisions. It may create delays in taking decisions.
(v) Risk of Implied Authority’ – Every’ partner is an agent of the firm. A dishonest partner may cause a great loss to the firm, All the partners may suffer due to the negligence.of one partner.
(vi) Non-transferability of Interest – A partner cannot transfer his interest in the firm to outsiders without the unanimous consent of all other partners. This discourages people from investing in partnership firms.
Suitability of Partnership – Despite its various disadvantages or limitations, partnership firm has not lost popularity. It is a simple and convenient form of proprietorship. This form of or|anisation is suitable where the size the business is relatively ginal I and I the capital requirements are low.
It is also suitable where the partners use their professional skills; That is why this form of organisation’s the most popular among chartered accountants, lawyers, stock brokers, estate agents, solicitors and doctors.
Partnership firm ¡s suitable under the following conditions:
- The business is run on a smàll or medium scale.
- Personal touch with the customers or clients is essential.
- lt is convenient Ibr the professionals to form partnership.
- lt facilitates partnership between those having capital and those having technical qualifications.
Why Is It Important to choose an appropriate form of organization? Discuss the factors that determines the choice of form of organization.
The important factors determining the choice of organization are discussed below:
(i) Cost and ease in setting up the organisation:
As far as initial business setting-up costs are concerned, sole proprietorship is the most inexpensive way of starting a business. However, the legal requirements are minimum and the scale of operations is small. In the case of partnership also, the advantage of fewer legal formalities and lower cost is there because of the limited scale of operations.
Cooperative societies and companies have to be compulsorily registered. The formation of a company involves a lengthy and expensive legal procedure. From the point of view of initial cost, therefore, sole proprietorship is the preferred form as it involves least expenditure. Company form of organisation, on the other hand, is more complex and involves greater costs.
In case of sole proprietorship and partnership firms, the liability of the owners/partners is unlimited. This may call for paying the debt from personal assets of the owners. In joint Hindu family business, only the Karta has unlimited liability.
In cooperative societies and companies, however, liability is limited and creditors can force payment of their claims only to the extent of the company’s assets. Hence, from the point of view of investors, the company form of organisation is more suitable as the risk involved is limited.
The continuity of sole proprietorship and partnership firms is affected by such events as death, insolvency or insanity of the owners. However, such factors do not affect the continuity of business in the case of organisations like joint Hindu family business, cooperative societies and companies.
In case the business needs a permanent structure, company form is more suitable. For short term ventures, proprietorship or partnership may be preferred.
(iv) Management ability:
A sole proprietor may find it difficult to have expertise in all functional areas of management. In other forms of organisations like partnership and company, there is no such problem. Division of work among the members in such organisations allows the managers to specialise in specific areas, leading to better decision making.
But this may lead to situations of conflicts because of differences of opinion amongst people. Further, if the organisation’s operations are complex in nature and require professionalised management, the company form of organisation is a better alternative.
Proprietorship or partnership may be suitable, where the simplicity of operations allow even people with limited skills to run the business. Thus, the nature of operations and the need for professionalised management affect the choice of the form of organisation.
(v) Capital considerations:
Companies are in a better position to collect large amounts of capital by issuing shares 10 a large number of investors. Partnership firms also have the advantage of the combined resources of all partners. But the resources of a sole proprietor are limited.
Thus, if the scale of operations is large, company form may be suitable whereas for medium and small-sized business one can opt for partnership or sole proprietorship. Further, from the point ’ of view of expansion, a company is more suitable because of its capability to raise more funds and invest in expansion plans.
It is precisely for this purpose that in our opening case Neha’s father suggested she should consider switching over to the company form of organisation.
(vi) Degree of control:
If direct control over operations and absolute decision-making power is required, proprietorship may be preferred. But if the owners do not mind sharing control and decision making, partnership or company form of organisation can be adopted.
The added advantage in the case of a company form of organisation is that there is complete separation of ownership and management and it is professionals who are appointed to independently manage the affairs of a company.
(vii) Nature of business:
If direct personal contact is needed with the customers such as in the case of a grocery store, proprietorship maybe more suitable. For large manufacturing units, however, when direct personal contact with the customer is not required, the company form of organisation may be adopted.
Similarly, in cases where services of a professional nature are required, a partnership form is much more suitable. It would not be out of place to mention here that the factors stated above are inter-related. Factors like capital contribution and risk vary with the size and nature of the business, and hence a form of business organization that is suitable from the point of view of the risks for a given business when run on a small scale might not be appropriate when the same business is carried on a large scale.
It is, therefore, suggested that all the relevant factors must be taken into consideration while making a decision with respect to the form of organisation that should be adopted.
Discuss the characteristic, merits and limitations of cooperative firm of organization. Also describe breifly different types of cooperative societies.
Characteristics of Cooperatives – The essential features of a cooperative form of organisation are discussed below
(1) Voluntary Association – A cooperative society is a voluntary organization of persons desirous of improving their economic status on cooperative basis. They can become the members of the cooperative society on their own and can leave it whenever they feel like, by giving a notice to the society,
(2) Open Membership – There is no restriction on entry into a cooperative society. Its membership isopen to all persons having certain common interests. Caste, creed, religion or sex is no bar on membership.
(3) Separate Legal Entity – A cooperative society is required to be registered with the Registrar of Cooperative Societies under the Cooperative Societies Act, 1912. On registration, it becomes a body corporate. It can own property in its own name. It can enter into contracts with other persons; It becomes an autonomous and self-governing organisation. It can also sue and be sued in its own name.-
(4) Service Motive – The primary aim of a cooperative society is
to provide service to its members. Its motto is “each for all and all for each”. However, a cooperative society may earn some profits for the benefit of its members. ,
(5) Democratic Management – A cooperative society is a democratic form of organisation because each member has equal voting rights. One member, one vote ensures democratic management and control of a cooperative society. The organisation of a cooperative society is democratic and all members have an equal voice in the management.
(6) Disposal of surplus – The surplus arising out of year’s working is not distributed among the members by way of dividend. A specified portion of the profits is transferred to Statutory Reserve Fund and then a fair rate of interest is paid on the capital subscribed by the members. The remaining profits are distributed equitably among the members according to the extent of the business transacted with it by each member.
Advantages and Disadvantages of Cooperative Organisation
Advantages of Cooperative Organisation – The cooperative form of organisation is gaining popularity because of the following advantages:
(1) Mutual Benefit Association Cooperatives are formed on the basis of voluntary association of persons to provide them with certain services at ‘no profit, no loss’ basis. The members form a society on the basis of mutual help. This promotes a feeling of cooperation and selflessness among the members.
(2) Steady Supply of Goods and Services – Consumers’ cooperative stores ensure a steady and regular supply of goods at reasonable prices by eliminating middlemen and thus avoiding their excessive profits.
(3) Fair Dealings – Cooperatives ensure fair and honest business practices. They do not indulge in overstocking and speculative buying of goods.
(4) Open Membership – Any person having a common interest can become a member of a cooperative society having one share. Moreover, the shares are non-transferable. Hence, the shares are free from Speculation.
(5) Democratic Management – Management of cooperative is fully democratic in nature because of the principle of ‘one man, one vote’. It prevents the domination of the rich shareholders having greater number of shares over the other shareholders of the society.
(6) Equitable Distribution of Surplus – The entire surplus is not distributed in the form of dividend on capital. The rate of dividend cannot exceed a certain limit. The yearly profit or surplus is utilised in transferring apart of it to the reserve fund and the remaining in the form of bonus to the members on the basis of their transactions with the society. This leads to the equitable distribution of surplus.
(7) Limited Liability- The liability of the members in a cooperative organisation is limited to the extent of their capital contribution. The effect of limited liability is mentioned in the bye-laws of the cooperatives which is checked by the registrar at the time of registering the same.
(8) Continuity – The cooperative society enjoys a separate legal
entity of its own independent of the entity of its members who own it. The death, leniency or insolvency of a member does not affect its existence.
(9) Government Assistance – Since cooperatives have been accepted by the Government as an instrument of economic policy, a number of grants, loans and financial assistance are offered to them to make them function efficiently.
Disadvantages of Cooperative Organisation – The cooperatives suffer from the following drawbacks:
(1) Limited Capital – Cooperative societies is not able to mobilise adequate capital for their large-scale operations because the rate of dividend on capital is low and every member has equal voting rights irrespective of the member of shares held by him. A cooperative society often faces shortage of funds.
(2) Inefficient Management – The guaranteed market for the cooperatives slackens the efforts of the management. Moreover, the management may not comprise of competent and efficient persons to deal with the business problems. A cooperative society cannot afford to employ expert management at high salaries.
(3) Excessive Government Regulations — The cooperatives are subjected to a variety of regulations from the cooperative department of the State Government partly because the Government offers a number of financial grants and partly because it is always anxious to see that the movement succeeds. All this has led to excessive Government regulations in the day-to-day functioning of the cooperative which, at times, amounts to interference.
(4) Lack of Motivation – Honorary office-bearers of a cooperative society have very little incentive to work hard for the society. The members of the managing committee with whom rests the responsibility of managing the cooperative do not feel sufficiently motivated to do their best to see the cooperative a grant success.
(5) Lack of Secrecy – As is usually common with the forms of organisation which enjoy separate legal entity and as such as under obligation to make full disclosures of their operations to their members, the cooperatives too being corporate in status fail to preserve their business secrets. Therefore, it becomes difficult to keep the secrets of business.
(6) Conflicts – Quite often disputes arise among the managing committee and members. Moreover, some members are indifferent towards the working of the cooperative society which gives unrestricted power to the managing committee.
(7) Misuse of Funds – Ignorance of business principles and misuse of funds for personal ends may lead to recurring losses. This may put the survival of the cooperative society in danger. The cooperative credit societies may advance loans to the members without sufficient security.
Types, of Cooperative Societies – Cooperatives Societies may be classified into different categories according to the nature of the services rendered by them. Following are the main types of cooperative societies:
- Consumers’cooperative societies.
- Cooperative credit societies.
- Producers’cooperative societies.
- Marketing cooperative societies.
- Cooperative fanning societies.
- Cooperative housing societies.
(1) Consumers’ Cooperative Societies – A consumer cooperative store is set up to ensure a steady supply of essential commodities at fair prices. A consumers’ cooperative store purchases the consumer goods either from the manufacturers or the wholesalers and then sells them to its members a reasonable prices.
The profits made by the society during a year are utilised for strengthening the reserve fund of the society, for declaring a moderate rate of dividend and for declaring a bonus to the members according to the purchases made by them. Such societies are formed to provide residential accommodation to their members either on ownership basis or at fair rents.
(2) Cooperative Credit Societies – Cooperative credit societies are formed to provide financial assistance in the form of direct loans to their members. These societies are organised both in rural and urban areas. Funds are pooled together by members’ contributions and are utilised in giving loans to needy members on easy terms. Thus, the members are protected from the clutches of the money-lenders who charge very high rates of interest. Another equally important purpose of credit cooperatives is to encourage the habit of thrift among their members.
(3) Producers’ Cooperative Societies – An industrial or producer’s cooperative is organised on small scale producers to face competition and to increase the production. The society sells the output in the market and distributes the profits by each member. Thus, a producers’ society not only provides money and materials to the small artisans but also undertakes to sell their products.
(4) Cooperative Marketing Societies – Cooperative marketing is of great importance to the small producers and agriculturists who face many difficulties in selling their output at remunerative profits. Marketing cooperatives seek to ensure a steady and favourable market for the output of their members. The output of its members is pooled together and sold according to market conditions. The profits on sales are distributed according to the contribution of the members to the pool. Marketing cooperatives eliminate middlemen and ensure honest trading practices as regards weight, measurement and accounting.
(5) Cooperative Farming Societies – These are voluntary associations of small farmers who join together to avail the benefits of large scale mechanised farming. It provides economic and social security to farmers. They aim at scientific organization of agriculture involving use of improved seeds, fertilizers, irrigation, soil conservation and other modem techniques.
(6) Cooperative Housing Societies – These societies are formed mostly in urban areas where the problem of housing is acute. These societies are allotted land by the land authority or by the Urban Development Authority at concessional prices. Such societies can also negotiate loans for its members on easy terms from financial institutions.
Distinguish between a Joint Hindu family business and a partnership.
Joint Hindu family business is the form of business owned by the members of a family. It is managed by the head of the family, known as karta, whose liability is unlimited. The liability of other members is limited. The membership attains since birth of a child in the family.
Partnership firm is an agreement between two or more persons to carry on legal business with profit motive, carried on by all or any one of them acting for all.
Difference between joint Hindu family business and partnership firm:
Following are the bases of difference between Joint Hindu family business and partnership- .
Difference between Partnership and Joint Hindu Family Business :
|Points of Difference||Partnership||Joint Hindu Family Business|
|1. Formation||Partnership a formed on the basis of Agreement according to Partnership Act, 1932.||It is formed according to Hindu law.|
|2. New Member||A new member can be admitted with the consent of other partners.||A male child becomes a member of the family business by birth.|
|3. Female membership||A female member can become the partner with the consent of other partners.||Female membership is not allowed.|
|4. Membership of minor||A minor can be admitted with the consent of other partners for profit only.||A male minor child becomes a member of the family business since birth.|
|5. Operation of a business||Every partner can take part actively in the affairs of the firm.||Karta, the head of the family is responsible for the operation of the business.|
|6. Effect of death||The partnership is dissolved with the death of the partner.||Hindu family business is not dissolved by the death of a member.|
|7. Number of members||There is a restriction on the number of members maximum of 20. and in the case of the banking business, only 10 members are required||There is no restriction on a maximum number of members.|
Despite limitations of size and resources, many people continue to prefer sole proprietorship over other forms of organizations? Why?
Sole proprietorship refers to a form of business organization which is owned, managed, and controlled by an individual who bears all risks and receives all profits. This form of business is suited mainly in areas of personalized services and small-scale activities due to a shortage of capital and limited abilities of an individual who is the proprietor.
Still, many people continue to prefer sole proprietorship over other form organization as sole proprietorship offers many advantages such as:
(i) Prompt Decision Making:
The decision-making is prompt under sole proprietorship as there is a considerable degree of freedom in making business decisions and there is no need to consult others as in the case of a partnership or co-operative societies. This results in the effective capitalization of market opportunities as and when they arise.
All the information related to business operations is kept confidential and secrecy is maintained as the sole decision-making authority rests with the proprietor unlike a partnership or co-operative form. A sole proprietor is also not bound legally to publish a firm’s accounts as in the case of a company.
(iii) Incentive to Work:
The sole proprietor receives all the business profits as a reward for bearing the business risk. He is the single owner and does not need to share profit. This provides an incentive to the sole proprietor to work hard.
(iv) Sense of Accomplishment:
There is a sense of personal satisfaction involved in working for oneself. It instills a sense of accomplishment and confidence in the individual as he/she is the one who takes all the decisions without any interference from others which is present in all other forms of organization.
(v) Ease of Formation and Closure:
An important merit of a sole proprietorship is the possibility of entering into business with minimal legal formalities. There is no separate law that governs sole proprietorship, unlike other forms like co-operative societies or companies. 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.