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Class 11
Business studies
Unit- forms of business organisation

Various forms of business organisations are as follows:

• Sole proprietorship
• Joint Hindu family business
• Partnership
• Cooperative societies
• Joint stock company

Sole proprietorship – the business.

Manage and control by a single
individual who is the
recipient of all profits and bearer of
all risks.

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�Features of sole proprietorship

1. Formation and closure – there is no
Any legal formalities are required to start a
sole proprietary business, though in some
cases one may require a license.
2. Liability-the owner is personally
responsible for payment of debts in case the
assets of the business are not sufficient to
meet all the debts. They have unlimited
liability.
3. Control- the right to make all decisions lies
absolutely with the Sole proprietor.
4. No separate entity- business does not
have an identity separate from the owner .
The owner is responsible for all the activities
of business.

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5. Lack of business continuity – In sole

proprietorship only one person control the
business, so death , insanity, bankruptcy will
have the direct effect on the business.

Merits:
1. Quick decision making- In sole
proprietorship decision are taken by one
person only so there is no wastage of
time.
2. Confidentiality – self decision making
authority enable the proprietor to keep
all the information confidential and
maintain secrecy.
3. Direct incentive – there is direct
relation between effort and reward .this
provide maximum incentive to the sole
trader to work hard.

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4. Sense of accomplishment-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.
5.Ease of formation and closure-
there is no separate law that governs sole
proprietorship . 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.

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Limitations
(i) Limited resources: there is a limit to the
credit raising capacity 0f a single person .
this reduces the scope of business growth.
Funds are not sufficient for medium or large
scale business.
(ii) Limited life of a business concern: the sole
proprietorship business is controlled by a
single person, so death , insanity,
bankruptcy affect the business and leads to
closure.
(iii) Unlimited liability: In Sole proprietorship
the single person is liable for all the debts. If
there is heavy loss the proprietor loss her all
business assets also he may have to sold his
personal assets.
(iv) Limited managerial ability: single person
can not be expert in all fields .it is very
difficult to find all the skills in one person .
The proprietor may overburden with so
many task.

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Joint Hindu family business

It refers to the form of organization where the
business is owned and controlled by the members
of the Hindu Family business . 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 member of this business.

Features

1. Formation : there should be at least two

members in a family and ancestral property
inherited by them.
2. Liability: the liabilities of karta (the head of
the family)have unlimited liability so his
personal assets can be used for paying debt of
the business. Other members have limited
liability .

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3. Control: the business is managed and

controlled by the senior member called karta.
He only takes all the decisions of the business.
4. Minor members: children are the members
of this business by birth . Hence, minor can also
be the member of the business
Merits.
1. Effective control: the karta has the
decision making power. This leads to prompt
and flexible decision making power.
2. Continued business existence: after
the death of karta the next elder member will
take the position of karta. So continuity of
business is not affected.
3. Limited liability of members: liability
of other members except karta is limited in
the business and their risk is well defined.
4. Increase loyalty and cooperation:
pride in the growth of business is linked to the
achievements of the family. this help in
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securing better cooperation from all the

members.
Limitations
1. Limited resources: the business faces
the problem of limited capital.it mainly
depend on ancestral property. This limit is
scope for expansion of business.
2. Unlimited liability of karta: the karta
not only have the responsibility of decision
making and managing the business, but also
suffer from disadvantage of unlimited liability.
3. Dominance of karta: only the karta
manage the business which some times not
acceptable to other members. This may cause
conflict among them and break down of a
family unit.
4. Limited managerial skills: the karta
cannot be expert in all the areas, the business
may suffer from his unwise decision. This

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result in poor profit or even losses of the

organization.
Partnership
According to Indian partnership act ,1932
partnership is the relation between persons
who have agreed to share the profit of the
business carried on by all or any one of them
acting for all .
Features
1. Formation : it comes into existence
through a legal agreement where the terms
and conditions governing the relationship
among the partners sharing of profit and
losses in a specified manner.
2. Liability: the liability of all the partners
is unlimited . The partners individually or
collectively pay the debts of the firm.
3 . Risk bearing: the partners share the
profit in the agreed ratio, also share loss in

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the Same ratio .if there is no ratio then they

distribute this equally.
4. Decision making and control: The
partners share amongst themselves the
responsibility of decision making
and control of day to day activities. Thus, the
activities of a partnership firm are managed
through the joint efforts of all the partners.
5. Continuity: Partnership is characterised by
lack of continuity of business since the death,
retirement, insolvency or insanity of any
partner can bring an end to the business.
Then the remaining partners may continue
the business.
6. No. of partners: according to the section
464 of companies act 2013 minimum number
of partners is two and maximum number of
partners can be 100.but As per Rule 10 of The
Companies(miscelleneous) Rules 2014, at
present the maximum number of members
can be 50.

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Merits
1. Ease of formation and closure:
It is very easy to form a partnership firm as no
legal formalities are required to be
completed. There is no compulsion to
registration of the firm.
2. Balanced decision making: partners
divided there work according to their skills
and knowledge. This not only reduce the
burden of work also leads to fewer errors in
judgements. So decisions are likely to be
balanced.
3. More funds: capital is contributed by a
number of partners. This makes it possible
to raise larger amount of funds as compared
to a sole proprietor.
4. risk sharing: the risk is shared by all the
partners. This reduce burden or stress on
single partner.

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5. Secrecy: A partnership firm is not legally

required to publish its accounts. So the affairs
of the partnership firm remain secret.
Limitations
1. Unlimited liability: liability of all the partners are
unlimited. In case of loss the business assets are
not sufficient to meet its debts then the creditors
claim over their personal property.
2. Limited resources: there is restrictions on the
number of partners and hence contribution in
terms of capital investment is usually not sufficient
to support large-scale business operation. So the
firm face problems in expansion beyond a certain
size.
3. Lack of continuity: partnership form is affected
by the death, retirement, insolvency of anyone
partner. This result in lack of continuity. Even the
partner can demand the dissolution of the firm.

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4. Lack of public confidence: the public has less trust

in partnership firms because accounts and annual
report are not published .
Types of partners
1. Active partner: active partner
participate in the management of the firm
and contribute his capital and get share and
profit and losses .His liability is unlimited.
2. Sleeping or dormant partner:
partner who did not take part in day to day
activities of the business is called sleeping
partner .it contribute capital to the firm and
get share in profit and losses.
3. Secret partner: the partner whose
association with the firm is unknown to the
general public. He contribute to the
capital of the firm, takes part in the
management, shares its profits and losses,
and has unlimited liability.

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4. Nominal partner: nominal partner are

not the real partners of the firm. He does not
contribute to its capital. He does not take
part in managing the firm, does not share its
profit or losses but is liable like other partners
to the third parties for the repayments of the
firm’s debts.
5. Partner by estoppel: the person is
considered partner by estoppel by his
initiative, behaviour. partners are held liable
for the debts of the firm because in the eyes
of the third party they are considered
partners. they does not contribute to capital,
don't take part in the management of the firm
and don't share profit and loss.
6. Partner by holding out: the partner
who does not call himself as a partner in the
firm .But does not object when the other call
him as a partner of the firm is partner by
holding out .

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Types of partnership
On the basis of duration

• Partnership at will: this partnership

is formed for indefinite period till the
partner want and is terminated by giving
notice of withdrawal from partnership to
the firm.
• Particular partnership :this
partnership is formed during a particular
venture .on the completion of that
venture it automatically comes to an end.
On the basis of liability
• General partnership:
the
partnership in which liability of all the
partners are unlimited.The partner enjoy
the right to take part in the management
of the firm .

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• Limited partnership: In this

partnership the liability of at least one
partner is unlimited and rest have limited
liability. Death, insolvency does not
affect the existence of the partnership
firm .
Partnership deed
The document containing terms and condition of a
partnership agreement is called partnership deed.
The common content of partnership deed are;
1. Name of the firm
2. Nature of business and location of business
3. Duration of business.
4. Investment made by each partner.
5. Distribution of profits and losses
6. Duties and obligations of the partners.
7. Salaries and withdrawals of the partners.
8. Terms governing admission, retirement and
expulsion of a partner.
9. Interest on capital and interest on drawings.
10. Procedure for dissolution of the firm.
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11. Preparation of accounts and their auditing.

12. Method of solving disputes.
Cooperative societies
The cooperative society is a voluntary association
of persons, who join together with the motive of
welfare of the members. Minimum 10 persons are
required to form a cooperative society . The
cooperative society is
compulsorily required to be registered under the
Cooperative Societies Act 1912.
Features
1. voluntary membership: A person is free to join
a cooperative society, and can also leave
anytime as per his desire. There cannot be any
compulsion for him to join or quit a society.
2. legal status: Registration of a
cooperative society is compulsory. It can buy and
sell the property In its own name and can enter

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into contract in its own name . Death, insolvency

does not affect the cooperative society.
3. Limited liability: The liability of the members of
a cooperative society is limited . This defines the
maximum risk that a member can be asked to
bear.
4. control: the power to take decisions lies in the
hand of elected managing committee . The
committee is elected through voting by members.
5. service motive: the main motive of
cooperating societies is to provide service to its
members not to earn profit . Earning profit is the
second motive .
Merits
1. equality in voting status : there is a principle of
“one man one vote”. All the members have equal
right to participate in the management
irrespective of capital contributed by them.

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2. limited liability: The liability of members of a

cooperative society is limited . The personal assets
of the members are, therefore, safe from
being used to repay business .
3. Stable existence: death, bankruptcy, insanity
doesn’t affect the business. The cooperative
organization have continuous and stable life and
exists for a long period of time.
4.Economy in operations: The members generally
offer honorary services to the society. on
elimination of middlemen, helps in reducing costs.
The customers or producers themselves are
members of the society, and hence the risk of bad
debts is lower.
5. Support from government: The support
from the Government in the form of low taxes,
subsidies, and low interest rates on loans.
6. Ease of formation: The cooperative

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society can be started with a minimum of ten

members. Its formation is governed by the
provisions of Cooperative Societies Act 1912.
Limitations
1. Limited resources: The low rate of dividend
offered on investment also acts as a deterrent in
attracting membership or more capital from the
members.
2.Inefficiency of management: all activities are
performed by the members only. They are in
experienced persons because the cooperative
societies can not afford to pay high salaries to the
professional and skilled people.
3.lack of secrecy: there are open discussion in the
meeting my member so it is difficult to maintain
secrecy .
4. Government control: there is excessive
government control and regulations by the
government. Interference in the functioning

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of the cooperative organisation through the

control exercised by the state cooperative
departments also negatively affects its freedom of
operation.
Joint stock company
A company can be described as an artificial person
having a separate legal entity, perpetual
succession and a common seal. It is governed by
the companies act 2013.
Features
1. Artificial person: it is artificial person created
by law. It's operations are performed by elected
representative known as directors.
2. Separate legal entity: Its assets and liabilities
are separate from those of its owners. The

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law does not recognise the business and owners

to be one and the same.
3. Formation: The formation of a company is a
time consuming, expensive and complicated
process. It involves the preparation of several
documents and compliance with several legal
requirements before it can start functioning.
4. Control: The management and control of the
affairs of the company is undertaken by the
Board of Directors, which appoints the top
management officials for running the business.
5.Risk bearing : The risk of losses in a company is
borne by all the share holders. This is unlike the
case of sole proprietorship or partnership firm
where one or few persons respectively bear the
losses.
Merits
1. Limited liability : only the assets of the
company can be used to settle the debts,
leaving the owner’s personal property free
from any charge. This reduces the degree of

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risk borne by an investor. Transfer of interest:

2 .Perpetual existence: A company will
continue to exist even if all the members
die. It can be liquidated only as per the
provisions of the Companies Act, 2013.
3. Scope for expansion: capital can be
attracted from the public as well as through
loans from banks and financial institutions.
Thus there is greater scope for expansion.
4. Transfer of interest: share of company can
easily sold and brought in the market. At
any time share investment can be converted
into cash and the same amount can be used
to buy shares of other company.
Limitations
1. Complexity in formation: The formation
of a company requires
greater time, effort and extensive
knowledge of legal requirements and the
procedures involved.

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2. Lack of secrecy: public company provide

time-to-time information to the office of the
registrar of companies. Such information is
available to the general public also. So, It is
difficult to maintain
complete secrecy about the operations
of company.
3. Delay in decision making :
Companies are managed through the Board
of Directors. Communication as well as
approval of various proposals may cause
delays not only in taking decisions but also
in acting upon them.
4. Conflict in interests: There
may be conflict of interest amongst
various stakeholders of a company.

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Types of companies
There are two types of companies
1.private company
2.public company

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