JUNIORS

COMMERCE IMPORTANT QUESTIONS

10 MARKS

1. Explain various objectives of Business?

A: Objectives of a business mean the purpose for which business is essential and carried on
proper selection of objectives is essential for the success of business. Therefore every business
man must select and define his business objective carefully and clearly.
The objectivities are divided into four types they are social , Economics Human and natural
objectivities

i) Economic Objectives: Business is basically an economics activity Therefore its primary

objectives are economic in nature The economic objectives of business are as follows

a) Earning Profits: Every business enterprise main objective is to earn profit . It is the hope
of earning profit that inspires people to start business profit is essential for the survival of
very business unit profit also serves as the barometer of stability efficiently and progress of a
business enterprise

b) Creating Customers: Profits refer from the business effort to satisfy the wants

and needs of customers .A business man can profit only when there are enough customer to
buy and pay for his goods and services The customers is the foundation of business and keeps
it in existence. Business exits to satisfy the wants tastes and preferences of customers

c) Innovations: Innovation refer to “Creation of new things resulting from the study

and experimentation research and development . In these days of competition a business can
be successful only when it creates new designs better machines, improved science and
technology have created a great scope for innovation in the business world

ii) Social objectives: Business does not exist in a vaccum. It is a part of society. It cannot
services and grew without the support of society . So business must have some social
objectives

a) Supplying desired goods at reasonable prices: Business is expected to supply the goods
and services requested by the society. Goods and services should be of good quality and these
should be supplied at reasonable prices. It is also the social obligation of business t avoid
malpractices like smuggling black marking and misleading advertising.
b) Fair Remuneration to employees: Employees must be given fair compensation for their
work . In addition to wages and salary a seasonable port of profit should be distributed
among employees by way of bonus such sharing and efficiency of employees. It is the
obligation of business to provide healthy and safe work environment for employees.
Employees workday and night to ensure smooth functioning of business. It is therefore the
duty of employees to provide hygienic working and living conditions for working.
c) Employment Generation: Business should provide opportunities for general employment
to members of the society. In a country like India unemployment has become a serious
problem and no government can offer job to all. Therefore provision of adequate and full
employment opportunities is a significant services to society.
d) Social Welfare: Business should provide support to social, cultural and religious
organisation. Business enterprise can build schools, colleges, libraries , dorms alas, hospitals,
sports bodies and research institutes. They can help non-government organisation like
CRY(Child relief and you) help and other which neither services to wreakers society.
iii) Human Objectives: The human objectivise of business are as follows

a) Labour Welfare: Business must recognise the dignity of labour and human factor should
be given due –recognition Adequate provision should be mode for their health safety and
social security.
b) Developing human resources: Employees must be provided with the opportunities for
developing new skills and activities. This can be done by training the employees and
conducting workshops on skill development and attitude Human resources are the most
variable asset of business and their development will help in the growth of business.
c) Participative Management : Employees should be allowed to take part in decision
making process of business. This will help in the development of employees workers
participation in managements will wishes in industrial democracy.
d)Labour managements Cooperative : Business should strive for creating and maintaining
cordial employer-employee relation so as to ensure peace and progress in industry.

iv) Natural Objectives : Natural objectives of business are as follows

a) Optimum utilisation of resources: Business should use the nation resources in the best
possible manner. Judicial allocation and optimum utilisation of sense resources is essential
for rapid and balanced economic growth of the country.
 b) National Self reliance: It is the study of business to help the government in increasing
exports and in including dependences on imports. This will help a country to achieve
economic independences.

c) Development of economics industries: Big business firms are expected to encourage

growth of small scale industries which are necessary of small scale firms can be developed as
activities which provide inputs to large scale industries.

d) Development of backward areas: Business is expected to give preferences to the

industrialisation of backward regions of the country balance regional development is necessary

for peace and progress in the country . It will also help in standard of living in backward areas.
Government offer special incentives to the businessmen who set up factories in modifies
backward areas.

2. Define Sole Trading Concern and explain its Advantages and Disadvantages.
A. Any business unit which is owned and controlled by a single individual is known as a sole
trading concern. The person who manages the sole trading concern is called a sole trader.
This organization is also known as sole proprietorship business (or) single entrepreneurship
(or) individual proprietorship. It is the oldest form of business organization.

DEFINITION :

According to wheeler “the sole proprietorship is that form of business ownership which is owned
and controlled by a single individual. He receives all the profits and bares risk of his property in the
success or failure of the enterprise”.

Advantages of sole trading concern :

The sole trading concern has the following merits.

1. Easy formation :

A sole trading organization can be started very easily and quickly. Registration is not needed,
licenses are not required and the government permission is also not required. Hence legal
formalities are very less in the establishment of sole trading concern. Establishment charges
are also very less for sole trading concern.

2. Quick decisions :

All the decisions are taken by a single personnel. Hence prompt decisions are possible in sole
trading. A sole trader being the supreme of his business, he need not consult with others for
taking decisions. Hence delay in taking decisions can be avoided. In modern times quick
decisions may yield profits to the sole trading concerns.

3. Flexibility of operations :

In sole trading concern changes can be made without any difficulty. This is because for
making changes the sole trader need not get the permission of government or as well as
outsider. Hence he can operate the business as per the changes in the business world.

4. Maintainance of business secrets :

Secrecy is very important to every business. If the secrets are leaked, the competition will
increases. As the sole trading concern is an one man’s business, it is possible to maintain the
business secrets. By this the sole trader can avoid the competition.

5. Direct contact with customers :

The sole trader performs every business activity directly. Hence he also undertakes the direct
sale activities. It gives a chance to maintain good relation with customers. By this he can study
the tastes and habits of the customer and makes the necessary changes in the quality of
products. So he can satisfy the needs of customers and can increase the sale and profits.

6. Direct control over expanses :

Every activity and every expense is performed and incurred respectively by the sole trader.
Hence he can have direct control over expenses. By this he can minimize the expenses to the
maximum extent. So great economy is possible in sole trading concern.

7. Training to family member :

A sole trader is assisted by his family members. Frequently the family member attend the
business to help the sole trader. It gives training to them. If suddenly death is caused to sole
trader, then the family members can undertake the business without difficulties.

8. Social benefits :

The people in the society need not depend on the govt. for employment. They can start own
business in the form of sole trading concerns. Hence they can provide employment
opportunities in the society. When number of business organizations increase the
productivity also increases. Sole trading concerns can avoid concentration of wealth in few
hands.
9. Reward for efforts :

The proprietor shows personal interest in the business. He puts his heart and sole in the
success of business. The profits are enjoyed by him alone. The direct relationship between
effort and reward is applicable in sole trading concern.

DISADVANTAGES :

The following are the dis-advantages of sole trading concern.

1. Limited capital:

The capital of the sole trading concern is limited. It is because the capital is totally contributed
by one person. Hence it is not possible to do the business in large scale.

2. Limited managerial skill :

Sole trader finds very less time to perform every function of business. Management will be
efficient when the business is operated in small scale. But the management will be inefficient
when the business expands.

3. Unlimited liability :

The liability of a sole trader is unlimited i.e., to clear the business liabilities the sole trader has
to sell not only the business assets but also his personal properties. Hence the liability of the
business is extended towards the personal properties of the sole trader.

4. Heavy burden of losses :

In sole trading concern the entire loss must be born by the sole trader. No one is going to
share the losses. Hence the sole trader has to bare the heavy burden of losses. But in case of
partnership as the losses are shared by the partners, they are less burdened with losses.

5. No continuous existence :

Sole trading concerns may be dissolved at the death or the insanity or at the insolvency of
the sole trader. Even if the family members are not interested in the business, the sole trading
organization has to be closed. So the sole trading concern lacks the continuous existence.

6. Limited scope for expansion :

The business of the sole trading organization can be expanded only to the limited areas. It is
because one has to manage everything. The sole trader cannot manage the business, if it is
expanded more.
 7. No division of labour and specialization :

In sole trading concern every activity should be performed by the sole trader. He has to look
of purchases. Production, sales, accounts, everything. Work is not distributed to others.
Hence the sole trader is over burdened with all the functions of business.

8. No large scale economics :

As there is only owner in sole trading concern, the capital is limited. Hence it is not possible
to get the economics of large scale operations with the limited capital.
3. Define Co-operative Scoiety and explain its Advantages and Disadvantages.
A. A cooperative society is an economic enterprise set up by economically weak individuals to
combat capitalistic monopolies. It is organised with the main object of , service, to its
members. The main principle of co-operative enterprise is self help through mutual help.

DEFINITION :

The co-operative societies Act 1912 defines a cooperative organisation as “A SOCIETY

WHICH HAS ITS OBJECTIVES,. THE PROMOTION OF THE INTEREST OF ITS MEMBERS
IN ACCORDANCE WITH THE PRINCIPLES OF COOPERATION”.

The following are the advantages of cooperative societies.

1. Easy formation :

It is easy and less costly to form a cooperative society. Registration is easy. Legal
formation in the registration are less.

2. Membership :

The membership of cooperative society is opened to each and every person. There is
no maximum limit for the members. Membership fees will be a small amount. So poor
and middle class people can join the society.

3. Democratic Management :

Co-operative societies are managed on democratic lines. Everyone has equal voice in
the management. Every member has only ons vote irrespective of the shares
purchased. Hence there will not be domination by any single person in the society.
4. Service Motive:

The main objective of a cooperative society is to provide service to its members. Hence
middle class and poorer class of people are benefited by the co-operative society

5. Low operating costs :

The administrative expenses of a cooperative society are usually low. members offer
their services voluntary at free of cost. Honorarium is paid to the administrators.
Hence, the expendses of the management will be minimum in cooperative
administrators.

6. Cash Trading :

The business of cooperative society b generatty carried or cash basis. Credit is not
allowed. As a result there will be no bad debts in the cooperative society.

7. Limited Liability:

The liability of every member is limited. This attracts the small sale and middle class
people in acquiring the membership.

8. Tax Consessions :

A cooperalive society enjoys special benefits like supply of finance at concessional rate
of interest. It is exempted from the payment of income tax, stamp duty, Registration
fee etc., it enjoys government help.

Disadvantages:

The following are the disadvantages of a co-operative society.

1. Inefficient Management :

As the funds are minimum, a cooperative society cannot afford to employ persons
with necessary ability and experience. There is favourism in making appointments. As
a result co-operative societies are not generally managed properly.

2. Limited Financial Resources :

Co-operative societies are started by economically weaker sections of society. Hence

the resources of such members are usually limited. The restriction and the principle of
öne member - one vote also discourages rich people from joining the society. Hence, it
cannot go for large scale expansion of business.
 3. Lakd of Unity :

The members of a cooperative society are from different section s of the society. Hence
there is a lack of harmony among them there the differences of opinions and clashes
break the unity of members.

4. No transferability :

In a co-operative society, a member cannot transfer his shares. He can be alloweed to

withdraw his capital. This prevents many people from joining the co-operative society.

5. Rigid State Control :

The co-operatives are controlled very strictly by the government through the
cooperative societies Act. Societies have to follow the rules and regulations of the
government and the act without fail.

6. Lack of secrecy :

The affairs of a co-operative society are exposed to all the memebrs. So it is difficult to
maintain serecy of business matters.

7. Political interference :

Co-operative societies are generally under the regulations and control to the
government. For the managing committees every government tries to send their own
party members to these societies. The societies are governed on political
considerations rather than on business lines.

8. Lack of compertitive strength :

Co-operative societies with limited resources are not able to compete with large scale
manufactures. Hence, the costs are more in cooerative societies.

4. Define Partnership Firm and Explain its features.

A. INTRODUCTION :

There are certain disadvantages in sole trading concern. They are limited capital, limited
managerial skill, heavy burden of losses etc. To overcome these disadvantages the
partnership firm has come into the existence. A partnership organization is one which will
have two or more owners.
DEFINITION :

According to section 4 of Indian partnership act 1932 “A partnership is the relationship between
persons who have agreed to share the profits of a business, carried on by all or any of them acting for
all”

According to the above definition a partnership firm will have the following features.

1. No. of Members :

There should be a minimum of two persons to establish a partnership firm. The maximum
no. of partners should not exceed 10 in case of banking business and 20 in case of other
business firms. To join as partner a person should have completed 18 years of age and must
have the sound mind.

2. Agreement :

Agreement is base for every partnership firm. Without an agreement among the partners the
partnership firm cannot come into the existence. The business of the partnership must be
conducted on the terms of agreement. The partnership agreement may be either in the oral
form or in the written form.

3. Unlimited liability :

The most important feature of partnership firm is unlimited liability of partners. i.e., partners
have to sell their personal properties for discharging the business liabilities. Hence there is
no guarantee for personal properties of partners.

4. Principal agent relationship :

In a partnership organization every partner is an agent of the firm and every partner is the
principal (owner). This indicates the relationship among the partners is principle agent
relationship.

5. No perpetual existence :

There is no continuous existence for partnership organization. At the death of a partner,

insanity of a partner, insolvency of a partner the partnership firm will be dissolved. So it
cannot continue for long time.
 6. Implied authority :

Every partner has an implied authority to act on behalf of the firm. It indicates every partner
is entitled to make purchases, sales, lend and borrow loans on behalf of the firm. The firm is
fully responsible for all the acts of the partners.

7. Sharing of profits :

Profits sharing is an important feature of partnership. The partners have to share the profits
of the firm according to the agreement or equally. The profits will come to the partners for
doing the business. If a firm is established not for sharing profits, it is not considered as
partnership.

8. Utmost good faith :

There must be mutually trust and confidence among the partners. It indicates every partner
should be honest and sincere and should have same feelings on other partners.

9. Management :

In the partnership form one partner can do the entire business or some of the partners or all
the partners can participate in the business. So business can be carried on by all the partners
or some of the partners can carry the business for the sake of all the partners.

10. Joint and several liabilities :

It is another feature of partnership that to every partner the joint and several liabilities are
applicable. If the loss is caused at the negligence of one partner it should be shared by all the
partners. It is called joint liability. The total liability of the firm is individually applicable to
each partner. This liability is called several liability.

5. Define Partnership Firm and Explain the advantages and disadvantagesof Partnership
Firm.
A. INTRODUCTION :

There are certain disadvantages in sole trading concern. They are limited capital, limited
managerial skill, heavy burden of losses etc. To overcome these disadvantages the
partnership firm has come into the existence. A partnership organization is one which will
have two or more owners.
DEFINITION :

According to section 4 of Indian partnership act 1932 “A partnership is the relationship between
persons who have agreed to share the profits of a business, carried on by all or any of them acting for
all”

The following are the advantages of partnership firm.

1. Large capital :

As the number of partners in the partnership firm are more, the capital will also be more than
that of sole trading concern. In this firm the capital is contributed by two or more persons.
Hence large scale business can be done in the partnership firm.

2. Quick decisions :

When compared with joint stock companies decision making is very fast in partnership firm.
It is because the govt. Permission is not needed. For making decision of partnership only
consent of all partners is sufficient. Hence quick decisions and prompt actions are possible in
partnership firm.

3. Division of work and specialization :

As the number of owners are more in partnership, the work can be divided among the
partners. Hence the burden of work reduces on each partners. The division of work is made
according to the attitudes of partners. Hence every partner will be continuously engaged in
the allotted work. Hence the efficiency in doing the work will be increased in every partner.
This leads to specialization.

4. Distribution of losses :

In partnership firm the loss is shared by all the partners. Hence the burden of loss is decreased
to every partner. But in case of sole trading, burden of loss will be more because one has to
bare entire loss.

5. Benefits of large scale operations :

Since the capital invested in partnership firm is more than that of sole trading, it is possible
to do the business in large scale. Hence many type of economy are available in partnership.
It means expenses can be minimized in the partnership firm.

Eg : Goods can be purchased at cheaper rates.

6. Protection of minorities interest :

In the partnership firm all the decisions are made at the consent of all the partners. Majority
partners cannot take the decisions. Even a partner has invested less amount of capital, he is
not neglected. Even the consent of that partner is essential for making decisions. Hence
minorities interests also well protected in the partnership firm.

7. More expansion of business :

As the no. of owners are more in partnership firm, the managerial ability will also be more.
Hence business can be expanded by covering no. of geographical areas. It is not possible in
case sole trading because one has to manage everything.

8. Easy formation :

It is easy to form a partnership organization like sole trading concern. Because, govt.
permission, licenses and Registration are not compulsory for partnership. Agreement among
the partners is sufficient to establish partnership firm. Even the registration is to be made the
procedure is simple for partnership firm.

9. Maintenance of business secrets :

In partnership the business secrets can be maintained and competition can be avoided. It is
because the partnership firm need not disclose the business information either to the govt. or
to the public, like joins stock company.

10. Personal contract with customers :

All the business transactions are directly performed by the partners of the firm. Hence
partners will have direct contact with customers. By this it is possible to know the tastes and
habits of customers. It is also possible to identify the changes in the tastes and habits. By this
the sales of the firm can be increased by maintaining suitable goods to the customers.

DISADVANTAGES :

The following are the dis-advantages of the partnership arm.

1. Unlimited liability :

Every partner of the firm has to bare the unlimited liability i.e., to clear the business liabilities
of the firm, partners have to sell their personal properties. Due to unlimited liability people
may hesitate to joint as a partner.
2. No continuous existence :

The existence of partnership firm is not continuous. At the death (or) insanity (or) insolvency
of one partner the partnership firm may be dissolved. There is uncertainty for the existence
of the firm due to these factors.

3. Lack of unity :

In partnership firm at the commencement, there will be unity among the partners. By the
passage of time and due to the dealings in money transactions differences of opinions may
be caused among the partners. These differences of opinions may lead to disputes among the
partners. Those disputes may dissolve the partnership firm. Hence the life of partnership firm
will be up to the existence of unity among the partners.

4. Limited growth :

The growth of business in partnership firm is limited when compared with joint stock
companies because number of owners of partnership firm are limited. Hence the managerial
skill is also limited. But in joint stock companies the financial resources are more by an
unlimited number of members. Hence the business can extended to the maximum extent in
companies.

5. Lack of public confidence :

The partnership firm will not have the public confidence. It is because the firm will not
disclose the results of the business to the public. Hence public will not have any confidence
on the partnership firm. Hence raising of loans from the public becomes a difficult task.

6. Risk of implied authority :

Every partner has implied authority to create the liability on behalf of the firm. This implied
authority increases the risk of innocent partners. Hence people may hesitate to join in
partnership firm.

7. Delay in taking decision :

o take decision in partnership the consent of all the partners is required. To obtain the consent
of the partners business matters are to be discussed and the decisions are made. For that time
delay is caused in partnership. Hence the profitable opportunities due to quick decisions may
be lost.
 8. High tax rate :

When compared with sole trading concern the tax rate imposed on the partnership firm is
more. Hence major portion of the profits must be transferred to govt. by paying taxes.

6. Explain about different types of Partners.

A. As per the nature the partners are classified into different types. They are :

1. Active partner :

The partner who takes initiative and active part in the affairs of the partnership is known as
active partner. Though he actively participates in the business, he is eligible to share only
profits. As per the Act, there is no rule to provide extra remuneration to active partner. But if
the agreement provides the active partner is eligible to receive the additional remuneration
in the form of salary or commission. He is also called managing partner or working partner.

2. Sleeping partner :

The partner who invests the capital and shares the profits without participating in the
business is called Sleeping partner. Though he is not participating in the management, he has
to bare the unlimited liability. He is also called as Dormant partner.

3. Nominal partner :

A nominal partner is a partner for the name sake. He neither contributes capital nor takes
part in the business. This partner will not share even the profits or losses. He sells his name
and fame for the partnership. He is not the real partner but his name will appear in the list of
partner. So he is liable to bare the unlimited liability.

4. Partner in profits only :

A partner who joins in the firm only for sharing profits but not for sharing losses is known
as Partner in profits only. This clause is also mentioned in the partnership deed. But this
partner also has to bare the unlimited liability. He contributes capital and also participates in
the business.

5. Estoppels partner :

Estoppel means behaviour or conduct. A person by his conduct gives an impression to

outsiders that he is the partner in the firm. He is known as Estoppel partner. In fact the
estoppel partner does not contribute any capital and will not participate in the business. He
is not going to share even the profits or losses but he misled the outsiders. Hence he has to
bare unlimited liability.

6. Partner by holding out :

If partners declare a particular person as partner and he does not restricts this even after
knowing, then, he becomes a partner by holding out. This type of partner is also liable to bare
unlimited liability of the firm. His acts also binds the firm.

7. Minor partner :

A minor is a person who is below the age of 18 years. So as per the law, he is not eligible to
enter into agreement. So he cannot be a partner because partnership comes by the agreement
among the partners. But if the partnership is already in existence and if all the other partners
give their consent, then a minor can join as a partner. To the minor partner unlimited liability
is not applicable. Minor partner can inspect the account books of the firm.

After attaining the majority of age and before six months, the minor partner has to decide
whether to continue or to dis-continue from the firm. For this he has to give a public
declaration. Otherwise unlimited liability is applicable to this partner from the date of joining.

8. Incoming partner :

A person who joins newly into the existing partnership firm as a partner is known as Incoming
partner. For this it requires to obtain the consent of all the other partners. To the incoming (new
partner) the share in profits or losses is applicable only from the date of joining. He will not have any
relation of past profits or past losses. At the admission of a new partner a new agreement is prepared
in partnership firm.

9. Outgoing partner :

This partner is also called as Retiring partner. A partner who retires from the partnership firm is
known as the outgoing partner. At the consent of remaining partner or by giving a notice to the
remaining partners, a partner can retire from the firm. He has to share the profits or losses of the firm
till the date of retirement. To the profits or losses after the retirement date, the retiring partner will
not have the share.

10. Sub partner :

A sub partner is one whose name will not appear in the list of partners of the firm. But he will have a
private agreement with a partner of the firm. Sub partner will not have any right to proceed against
the firm. He is also not liable to bare the unlimited liability of the firm. He only shares the profits or
losses as per the private agreement with the partner of the firm.
7. Explain the differences between Joint Stock Company & Partnership.
A.
S no Items of Partnership Firm Joint Stock Company
difference
1 The Acts It is governed by the Indian It is organised and monitored
Partnership Act 1932 by the provisions of
Company Act 2013
2 Registration It is not compulsory , but it can enjoy It is compulsory In the
certain privileges if registered absence of registration , it
can’t commence its business.
3 Commencement It can start its business after entering A private company cant’s
of Business into an agreement without start its busines without
registration also. obtaining certificate of
incorporation form from the
register. A public company
has to obtain both certificate
of incorption and
commencement of business.
4 Number The minimum members required is In case of Private company,
of Members two and maximum is 10 in case of minimum members required
banking business and 20 in case of is two and maximum I 50.
non banking business. But in case of public
company th minimum
members are 7 and there is
no ceiling for maximum
members.
5 Legal Status It has no separate legal entity It has a separate entity and
distinct from its members.
6 Liability The liability of partners is unlimited The liability of members is
and they are jointly and individually limited to the extent of their
responsible for liabilities of the firm share values. They are not
personally liable
7 Transfer of A partner can transfer his share only There is no restriction on the
shares with the consent of all other partners transfer of shares of a public
of the firm. company and in private
company shares can’t be
transferred.
8 Management It is managed and controlled by the It is managed by Board of
partners and each of them can Directors and members can’t
participate in business operation. participate in day to day
activities of the company.
9 Stautory There are no rules and regulations It must maintain the
Regulations with regard to maintaining books and prescribed books and have a
accounts periodically audit. It should
give requisite information to
the Register of companies
also
10 Existence It is wound up on the death, It is not affected by
retirement or insolvency of the shareholder death of
partners. Hence existence of the firm insolvency It exists
in uncertain. continuously
8. Explain the differences between Sole Trading Concern & Partnership.
A. The Sole Trading Concern and partnership firms are private firms, but the following
differences exists among them.

1. No. of Owners :

In sole trading concern there is only one owner. The name of the owner is sole trader where
as in partnership the minimum number of members is 2 and the maximum number is limited
to 10 in case of banking business and 20 in case of other businesses.

2. Capital :

The capital of sole trading concern is less because it is contributed by only one owner, where
as the capital of partnership firm will be more because the number of owners are more than
that of sole trading concern. Hence large scale business is possible in partnership firm.

3. Burden of loss :

As one has to bare the entire loss in sole trading, the loss burden will be more on sole trader.
But incase of partnership the losses are shared by the partners. Hence the burden of loss
imposed on each partner is less.

4. Agreement :

It is base for every partnership firm. Without agreement the business cannot be operated
properly in partnership. Such an agreement is not required in sole trading because of one
owner.

5. Division of work and specialization :

As there are two or more owners in partnership, work can be divided among the partners.
The division of work leads to specialization in partnership. The work cannot be divided and
specialization cannot be achieved in sole trading because of one owner.

6. Expansion of business :

The business expansion in sole trading concern is limited because there is only one owner
but business can be expanded more incase of partnership because there are number of
partners in partnership firm.
 7. Time for taking decisions :

In sole trading concern the time for taking decisions is very less because, only one owner has
to take it. Where as more time is needed in partnership because the consent of all the partner
is essential for taking decision.

8. Implied authority :

In sole trading concern as there is only one owner, he is only have the authority to bind the
firm. Where as to partnership implied authority to bind the firm is applicable to more
members because there are two or more owners.

9. Act applicable :

There is no specific act to operate the sole trading concern but the partnership firm has to run
as per the provisions of Indian Partnership Act 1932.

10. Economics of large scale of operations :

As the capital of sole trading concern is less. It is not possible to do the business in large scale.
But the capital of partnership firm is more. Hence it is possible to do the business in large
scale. The economics of large scale operations are only available to partnership firm.

9. Define Joint Stock Company. Explain the features of a Joint Stock Company.

A: Sole trading concern and partnership firms have some basic limitations with regard to the size
of capital, nature of liability and also continuity. To eliminate these limitations the new form
of business organization has come into the existence in the name of Joint stock company. It is
an association of persons for sharing the profits by doing a business.

DEFINITION :

According to section 4 of Indian Companies Act 2013,“A company is an artificial person,

created under eye of law with perpetual succession and a common seal”.

FEATURES :

The following are the features of joint stock company.

1. Voluntary association of persons :

There must be at least seven members to start a Joint stock company. The maximum number
is unlimited. In case of private company the minimum number is 2 and maximum is
restricted to 50.
2. Transfer of shares :

The shares of joint stock company are freely transferable from one person to another. For
this the permission of other shareholders is not required. However, the share transfer is
restricted in the private company

3. Limited liability :

In joint stock company the liability of shareholders is limited to the extent capital
investment. Hence shareholders need not sell their properties for the discharge of the
company’s liability.

4. Management :

As the number of the shareholders are more, they elect among themselves some of the
persons as directors. The management will be in the hands of these directors.

5. Continuous existence :

Members may come and members may go, but the company is continuous for ever and
ever. A company has uninterrupted existence even after the death or insanity or insolvency
of share holders.

6. Separate legal entity :

Joint stock company will have a separate legal entity. It has an independent existence. It is
separate from its members. It is treated as an artificial person. Hence, like natural human
beings it can enter into contracts, it can purchase assets in its own name. It can also file suits
against the defaulters.

7. Common seal :

Though a company is treated as an artificial person it will not have the physical form. Hence
it cannot sign its name on a paper. So it has a common seal. Every document of the company
should be affixed by the common seal.

8. Compulsory registration :

The registration of joint stock company is compulsory. Without registration, a company

cannot come into the existence. For the registration of the company a number of legal
formalities are to be fulfilled as per the Indian Companies Act, 2013.
 9. Capital division into shares :

The total capital of joint stock company is divided into certain equal number of units. Each
unit is called a share. The persons, who invest the amount in the shares is treated as
shareholders, who are considered as the owners of the joint stock company.

10. Applicability of Companies act :

To perform the activities of joint stock companies , it requires to follow the rules and
regulations of Indian Companies Act, 2013. All the activities of the companies must be
within the limits of Companies Act, 2013.

10. Explain the Advantages and Disadvantages of Joint Stock Company.

A. The, company form of organisation has been successful in all countries of the world. It is
superior to sole proprietorship and partnership organisation. The following are the advantages
of a Joint Stock Companies.

1. Larger financial resources:

A company can secure large capital than sole trading and partnership. This is because there
is no limit on the number of members in the company. As the shares are freely transferable
and the applicability of limited liability attracts more number of investors. On account of
the above reasons a company can secure very large amount of capital.
2. Limited Liability:
Liability of a shareholder is limited to the value of shares purchased by him. Hence the risk
is limited. The limited liability encourages many persons to invest shares in joint stock
companies.
3. Continuity in existence:
A company has continuous existence. Even at the death or insolvency or insanity of
shareholders the company will continue. Hence, company has the stability of business by
continuous existence.
4. Transfer of Shares:
The shares of a public company are freely transferable. The shareholder can settle his shares
through stock exchange at any time. This provides liquidity for the investments.
5. Efficient Management:
As large resources are available for the company, appointment of talented persons is
possible. Hence, the management becomes efficient in the company.
6. Economies of large scale production :
Every company can undertake business on large scale, It can purchase costly and upto date
machines. It can purchase raw materials in large quantities at concessional rates, Hence
large scale economies are available to companies.
7. Diffused Risks:
The risk of loss in a company is spread over a large number of investors. Hence, the burden
of loss on every shareholder is reduced.
8. Promotion of savings and investments habits:
Companies encourage people to save small amounts for fee purchase of shares and
debentures. By this, in one way the saving habits of the people can be increased and in other
way heavy industries can be established with the small savings of people.
9. Social Benefits:
Companies can supply goods of better equality of lower prices because the company carries
large scale production. Companies also provide· employment to millions of people. They
also increases the national income of the Country by paying huge amount as taxes,
DISADVANTAGES:
The following are the disadvantages of Joint stock companies.
1. Difficulty in the formation :
It is costly and difficult to form a company. Member of legal firms are to be obeyed for the
promotion of company. A number of documents have to be prepared for registration.
Hence, it costly and difficult to form a company,
2. Delay in decisions :
Quick decisions and prompt actions are absent in the company. There will be delay in
decisions. As a result profitable opportunities may be missed.
3. Lack of secrecy :
In the company every thing is discussed in the meetings of shareholders and board of
directors Hence , trade secrets cannot be maintained in the companies .
4. Excessive Government control :
A large number of rules and regulations are framed for the working of companies. The
companies have to follow the rules of the government for internal working. Hence, a lot of
time, effort and money is wasted in satisfying the requirements of the government.
 5. Lack of initiative :
In the company the role of shareholders (owners) is very limited. The management of the
company is in the hands of director and officials of the company. They lake initiative
because there efforts and rewards.
6. Fraudulent Management :
Shareholders do not take active part in the management of the company. They elect
directors periodically for doing the management. Those directors may misuse their powers
for personal gains.
7. Concentration of Economic Power: The company type of organisation has helped the
concentration of economic power in a few hands. Some persons become directors in a
number of companies and will try to formulate policies for their personal gains.

11. What is Memorandum of Associations? Explain its Clauses?

A: INTRODUCTION :

The Memorandum of Association is the most important document of joint stock

company. It is the charter of the company which describes the objects for which the company
is established. The memorandum describes the relation of the company with outside world.
This document enables the shareholders, creditors and those who deal with the company about
the permitted range of activities. For the promotion of any type of joint stock company, it
requires the preparation of memorandum.

Memorandum is to be prepared carefully because it tells about the limitations of Joint

Stock Company. It has to be prepared with the provisions of Companies Act and after the
preparation it must be signed by at least 7 members in case of Public company or at least by
two members in case of Private limited company. When this document is filed with the
Registrar, he issues the certificate of incorporation. With the help of this certificate a private
company can commence the business.

The Memorandum of Association contains six clauses.

(1) Name clause

(2) Situation clause

(3) Object clause

(4) Capital clause

(5) Liability clause

(6) Subscription clause

1) Name clause : It contains the name of the joint stock company. A company can choose any
name by following the specific rules. They are :

i)The name of the company should not identical with the name of the another company
which was already registered.

ii)The name should not include the prohibited words like Government and other names

prohibited by Names and Emblems Act, 1950. If it is a public company, the name should
end with the word ‘Limited’. If it is a private company, the name should end with the words

‘Private Limited’. By following these rules, a company can select any name of the word.

2) Situation clause : The second para of memorandum consists the name of the state in which
the registered office (head office) is situated. The registered office means the office which
the company is maintaining its statutory books, common seals and other accounting books.
The situation clause determines the jurisdiction of the company.

3) Capital clause : This clause gives the details of the capital i.e., the Authorised capital, which
is maximum limit and division of capital into types of shares by which the capital is secured.
It tells about the limits of borrowing powers of the company.

4) Objects clause : This is the important clause in the Memorandum. It defines the scope of
activities of a joint stock company. A company cannot do any business which exceeds the
scope of these objectives. Hence this clause must be carefully drafted. The objects consist of
the primary objects of the company on which the company is running. It also must state the
objects incidental to attain the main objectives. If it also includes secondary objectives of
company. This clause is considered as heart of Memorandum.

5) Liability clause : This clause tells about the liability of the members. It may be limited to
the extent of the face value of the shares purchased by them or the liability of the company
members is limited to the extent of guarantee given by them or liability may be unlimited.

6) Subscription clause : In this clause the declaration from the initial members towards the
willingness in joining the company is stated. They must give sign the memorandum in
presence of fitness. At least 7 members in case of public company and two members in case
of private company must the signature in the Memorandum. Every signatory of
 Memorandum must take at least one share each. The signatories are required to write the
number of shares acquired by them against their names.

Memorandum must be duly stamped and submitted to the Registrar of joint stock company
to get the Certificate of Incorporation.

12. What is Articles of Associations? Explain its contents.

A: In the promotion of joint stock company the promoter has to submit number of documents
with the Registrar of joint stock companies. Among these documents Articles of Association is
the second one.

This document is also helpful in getting the Certificate of Incorporation. This document
provides rules and regulations regarding internal issues of the company. It tells about the
relationship between the company and the employees of the organization. It defines the duties,
powers and rights of all the Board of directors, Shareholders, Debenture holders and the
officials of the organization.

An Articles of Association is prepared in paragraphs by giving a sequence numbers and is

signed by the members of joint stock company. In case of public company if the articles of
association is not prepared, the articles mentioned in the schedule-I of Table-A of Joint stock
companies Act, 1956 must be followed for the internal management. The company limited by
guarantee and the Pvt. Ltd.

Company must prepare the Articles of Association.

Contents of Articles of Association :

In general an articles of association of any joint stock company contains the following contents.

1. The amount of share capital and its division into various types of shares

2. The face value of the share and the issue value of the share

3. Issues and allotments of each class of share

4. Rights and duties of each class of shareholders.

5. Procedure in the transfer of share.

6. Procedure in the transmission of share.

7. Forfeiture of shares.

8. Lien on shares
9. Rules regarding alteration of share capital.

10.Conversion of shares into stock and stock into shares.

11. Issue of share warrants.

12. Meetings of the company.

13. Voting rights of company.

14. Borrowing power of the comp[any.

15. Qualification and dis-qualification of directors.

16. Powers, duties, remuneration etc. of board of directors.

17. Matters relating to accounts and audit.

18. Creation of reserves, depreciation etc.

19. Procedure for declaring dividend.

20. Procedures of the appointment of secretary, manager, managing director etc.

21. Minimum subscription

22. Winding up of the company.

23. Adoption of preliminary contracts.

Alteration of articles of association :

A company can alter its Articles by making a special resolution. If the change is within the
scope of memorandum of association, to alter the Articles, permission of the court is not
necessary. Alteration of Articles of association is subjected to the following limitations.

1. Alteration must not be against the provisions of Memorandum.

2. Alteration should not be illegal.

3. Alteration should not exceed the provisions of the Companies act.

4. Alteration should not defraud the minority shareholders.

13. Differentiate between a Private Company and a Public Company.

A: The Indian Companies Act 2013 defines a public company as a company which is not a private
limited company. In other words a public company is a company which does not limit its
members to 50 and is not prevented from issuing prospectus. But a private limited company is
restricted the transfer of shares, limits the members into 50 and prevented from issuing
prospectus. So a lot of differences are there in between Public and Private company.

The following are the differences.

1. Members : In a public company there must be at least 7 members for the incorporation and
the maximum members are unlimited. In case of a private company the minimum members of

shareholders are two and maximum members are restricted to 50.

2. Transfer of shares : The shares of a public company can be transferred very easily whenever

the shareholders are in need of cash. Whereas transfer of shares by the members is restricted
in private limited company.

3. Issue of prospectus : In case of a public company the subscription towards shares and

Debentures can be obtained by inviting public by the issue of Prospectus. Whereas in a private
company the issue of prospectus is restricted because of the limit in the maximum number of
shareholders (50 members).

4. Number of directors : In public company there must be at least three directors for doing

the management. Whereas in private limited company minimum number of directors for
management is fixed as two.

5. Commencement : A public company can commence the business after obtaining the

certificate of “Commencement of Business”. This certificate is obtained after the obtaining of

Certificate of Incorporation. A private company can commence the business just after getting
the Certificate of Incorporation.

6. Remuneration of directors : In case of public company legal restrictions are imposed in

the payment of remuneration to the directors i.e., the remuneration of directors should not
exceed 11% Net profit. There is no such restriction in private company.

7. Statutory meeting : A public company must hold the statutory meeting and must file a
Statutory Report with the Registrar at the end of the incorporation. A private company need
not hold any Statutory meeting in the life time.

8. Loans to directors : In public company for obtaining the loans the directors have to get the

permission from the Company Law Board or from Central Government. Whereas such
permissions are not needed for the directors in private company for obtainment of loans.

9. Restrictions in fixing the name : After selecting the name the word ‘limited’ must be added

at the end of the name in public company. Whereas it is necessary to affix the words ‘private
limited’ for the name of private company.

10. Issue of differed shares : A public company cannot issue differed shares since from the

Existence of Indian Companies Act, 2013. Whereas a private company can issue differed shares.

11. Qualification shares : A person who wants to nominate as director in the public company

must take up the qualification shares. Whereas in private company there is no such restriction.

12. Resolution for election : In public company separate resolution must be passed to elect

each director. Whereas a single resolution is enough to appoint all the directors in private
company.

13. Rule of minimum subscription : In public company allotment of the shares can be made

after securing minimum subscription. Whereas to allot the shares the clause of minimum
subscription need not be followed in Private company.

14. Rule of the retirement of directors : In public company at least 1/3rd of the directors must

retire every year by rotation. Whereas in private company the rotation rule is not followed for
the retirement of directors.

15. Articles of association : In public company the document Articles of Association is

optional for the internal management. The public company can use the rules mentioned in
Table–A of Indian Companies Act 2013 for the internal management , whereas it is legal
obligation to prepare the Articles of Association in Private companies and the own Articles
must be filed with the Registrar.

16. Rule regarding age of directors : In normal circumstances the persons who attain 65 years
 of age cannot continue as directors in public companies. Whereas there is no such age limit to
the directors of a private limited company.

17. Quorum : In public company to pass a resolution in the shareholders meeting at least

5 members of shareholders must attend as quorum. Whereas in private company the quorum
in the meeting is fixed as 2 members.

18. Submission of final accounts and annual reports : In public company at the end of

Each accounting year the directors are supposed to file annual report to the registrar of joint
stock companies along with Profit and Loss account and Balance Sheet. Whereas in case of a
private company the balance sheet only is attached to the annual report and the profit and loss
account is not attached.

14. Explain the types of preference shares.

A. Shares which carry preferential rights with regard to the payment of dividend and repayment
of capital are called preference shares. They are many types. The following are the various
types of preference shares.

1. Cumulative preference shares : The holders of these shares have a right to get dividend for

those years for which company earned no profits. When there are divisible profits,

cumulative preference share holders are paid dividend for all the previous years in which

the dividend could not be declared.

2. Non cumulative preference shares : The holders of these shares have no right for the arrears

of dividend. They are paid dividend if there are sufficient profits. They cannot claim arrears

of dividend in subsequent years.

3. Participating preference shares : Participating preference share holders are also eligible for

a Fixed dividend. But they will get a right to share surplus profits along with other classes

of share holders ‘if company makes huge profits. When a company issues participating

preference shares the maximum rate of dividend on equity shares will be fixed.

4. Non participating preference shares: The holder of such shares do not enjoy right of
participating in the profit of the company.
5. Redeemable preference shares : In these shares, the capital is repaid after a certain period.
 The company can redeem these shares either out of profits or out of money received by
fresh issue of shares. These shares are issued to keep the financial structure flexible.
6. Irredeemable preference shares : The share on which capital cannot be returned upto the
dissolution of the company are known as irredeemable preference shares,
7. Convertible shares: These shares are of modern type. The holders of these shares are
having the option to convert their preference shares into the equity shares after a certain
period. Upto the lapse of that certain period fixed amount of dividend is paid every year.
If this provision is not present then the shares are called inconvertible preference shares.

8. Non convertible preference shares: Non convertible preference shares cannot be

sconverted into equity shares.

15. Define Debenture and explain the types of Debentures.

A. A debenture is an acknowledgement of debt, It is a document issued by the company by its

common seal acknowledging the debt. Debenture contains the terms like the rate of interest,
the period of payment and nature of security. Company pays fixed interest on debenture. A
debenture holder is a creditor of the company.

Types of Debentures : The following are the types of Debentures.

1. Simple or unsecured Debentures : Debentures which are issued without a security of

assets of the company are called unsecured or simple debentures They are also called naked
debentures. These debenture holders -are just unsecured creditors.

2. Secured or Mortgaged Debentures : When debentures are issued on the security of assets
of the company, they are called mortgaged or secured debentures. When the company fails to
pay interest or principal amount, the debenture holders will have the chance to sell the
property for the recovery of their dues.

3. Bearer Debentures : These debentures are easily transferable. The interest and principal
amount will be paid, to the barer of these debentures. The transfer need not be entered in the
books of companies. Interest is paid basing on the coupons attached to the debenture
certificates.

4. Registered Debentures : The registered debentures are not transferable by mere delivery.
These can be transferred from one person to another by registering a transfer deed with the
 company. Interest and principal amount will be paid to those persons whose names appear in
the register of debenture holders.

5. Redeemable Debentures : Debentures which will be repaid. After a certain period are
called redeemable debentures. The interest is paid on these debentures periodically. The
principal amount will be returned after a fixed period. Companies usually issue redeemable
debentures.

6. Irredeemable debentures : Debentures on which the principal amount is not paid during
the life time of the company are called irredeemable debentures. These debentures are very
rarely issued by companies.

7. Convertible Debentures : Debentures which can be converted into shares at the option of
the holders are called convertible debentures. Such conversion is permitted only after a
specific period.

5 MARKS

1. Define Business and Expalin its Features.

A. According to L.H. Hanney business means “ a human activity whose objective is to create
wealth through purchase and sale of goods and services”.

So business means purchase and sale of goods for making profits and for increase in the
wealth. Business also involves the production of goods.

Features of business : The following are the features of the business.

1. Exchange of goods and services :

The main reason for the growth of all business activities is the ever increasing wants of human
beings. The satisfaction of one want gives rise to the need to satisfy another higher want. In
the process of satisfying all these wants the sale, exchange of goods and services are essential.

2. Dealing in goods and services :

Business consists in dealings in goods and services. These goods have to satisfy the needs of
human beings. The goods may be classified into consumer goods and producers goods.
Consumer goods are those which are purchased by the final consumers for consumption.
Producer goods are those which are purchased for doing production of consumer’s goods.

Eg : Plant and machinery.

 3. Profit motive :

Profits are essential for the survival of any business. The profit encourages the business
activity. But the profit should be reasonable and legal. Without making profits if any activity
is performed it should not be considered as business activity.

4. Continuity :

If a single transactions yields profit, it should not be considered as business. The business
involves the exchange of goods and services continuously.

Eg : If a person sells a T.V. set and earns profit, it does not constitute business. But if the same
person keeps stocks of such T.V. sets and conducts regularly the sales then it becomes
business.

5. Risk :

Risk is an integral part of a business. Though the object of business is to make profit but losses
are also common to the business. The causes for the losses are many. Particularly external
atmosphere cannot be controlled.

Eg : If the customers tastes and habits change, then the goods which are purchased, on
them the capital will be blocked. This is one cause for the risk. Natural calamities like floods,
earth quakes etc. are also causes losses to the business. Accidents also causes the loss.

2. Explain the Social Responsibilities of Business.

A. Business organisations are obliged to consider social impact of their decisions. The obligation
of any business to protects and serve public interest is known as social responsibility of
business. Any responsibility business has particularly towards members of society with
whom they interest or towards the society in general is called as social responsibility.
The concept of social responsibility :
Every business operates within a society. It uses the resources of the society and
depends on the society for its functioning. This creates an obligation on the part of business
to look after the welfare of the society . Therefore all the activities of the business should be
such that they will not harm, rather they will protect and constitute to the interest of the
society social responsibility of business refer to all such duties and obligations of business
directed towards welfare of society.
Social responsibility towards different Interest Groups:
The business generally intercepts with owners, Investors, employees, suppliers
customers Competitors government and society. They are called interest groups such
interest groups are given below:

1) Responsibility towards
2) Responsibility towards employees
3) Responsibility towards supplies
4) Responsibility towards customers
5) Responsibility towards Governments
6) Responsibility towards society
1) Responsibility towards owners: Owners are the persons who own the business. They
contributes capital and bear the business risk. The primary responsibilities of business risk.
The primary responsibility of business towards its owners are .
a) Run the business efficiently
b) Proper utilisation of capital and other resources.
c) Growth and appreciation of capital
d) Regular and fair return on capital invested by way of dividends
2) Responsibility towards employees: Business needs employees or workers to work for it.
These employees put their best effort for the befits of the business. The responsibility of
business towards its employees include.
a) Timely and regular payments of wages and salaries
b) Proper working conditions and welfare
c) Opportunity for better career prospects
d) Job security as well as social security like facilities of provident fund group insurance,
pension, retirement benefit etc.,
3) Responsibility towards suppliers: Suppliers are business men who supply raw material
and other items requested by manufactures and traders. Certain supplier called distributions
supply finished products to the consumers The responsibility of business towards suppliers
are
a) Giving qualities goods at reasonable prices
b) Dealing n fair terms and condition
c) Availing reasonable credit period
d) Timely payment of dues.
 4) Responsibility towards customers: No business can survive without customers As a part
of the responsibility of business towards them the business should provide the following
facilities
a) Products and services must be qualitative
b) Giving delivery of goods with in stipulated time
c) Reasonable price
d) There must be proper after sales service
e) Complaints and Grievance of the consumers If any must be settled quickly
f) Unfair means like under weighing the products adulteration etc must be avoided.
5) Responsibility towards Government: Business activities are governed by rules and
regulations framed by the government . The various responsibilities of business towards
government are .
a) Setting up units as per guidelines o government
b) Payments of fees duties and taxes regularly as well as honesty.
c) Conforming to pollution control norms set up by government
d) Not to indulge in corruption through birding and other unlawful activities.
6) Responsibility towards society: A society consists of individuals, groups, organisation
families etc., They all are the members of the society Thus it has certain responsibilities
towards society they are.
a) To help the weaker and backward section of society
b) To preserve and promote social and culture values
c) To generate employment
d) To protect the environment
e) To conserve natural resources and wildlife
f) To promote sports and culture.

3. Define Sole-Propritorship and Explain its Features.

A. Any business unit which is owned and controlled by a single individual is known as a sole
trading concern. The person who manages the sole trading concern is called a sole trader.
This organization is also known as sole proprietorship business (or) single entrepreneurship
(or) individual proprietorship. It is the oldest form of business organization.
DEFINITION :

According to wheeler “the sole proprietorship is that form of business ownership which is owned
and controlled by a single individual. He receives all the profits and bares risk of his property in the
success or failure of the enterprise”.

Advantages of sole trading concern :

The following are the important features of sole proprietorship business organisation:
(a) Individual Initiative: The sole proprietorship business is started by the initiative of a
single person who wishes to start the business. He prepares the business plan and arranges
various factors of production. The profits or losses of the business are taken by the individual.
(b) Single Ownership: The sole proprietorship form of business organisation has a single
owner who himself/herself starts the business by bringing together all the resources. He/
She only looks after the business affairs.
(c) Less Legal Formalities: The formation and operation of a sole proprietorship involves less
legal formalities. Thus, its formation and winding up is quite easy and simple.
(d) Unlimited Liability: The important feature of the sole proprietorship is that the liability
of the sole proprietor is unlimited. In case of loss, if his/her business assets are not enough
to pay the business liabilities, his personal property can also be utilised to pay off the
liabilities of the business.
(e) Ownership and Management: In sole trade business, there is no separate existence of the
business with the owner. The owner himself/herself manages the business as per his/her
own skills and intelligence. There is no separation of ownership and management as is the
case with company form of business organisation. The business is dissolved if the owner dies,
becomes insolvent or is removed from the business.
(f) Motivation: The sole proprietor enjoys all the profits and at the same time bears the losses,
if any. No other person shares the profits and losses of the business. There is a direct
relationship between efforts and earnings. If he works more, he will earn more. This
motivates him/her to expand the business activities. He alone bears the risks and reaps the
profits.
(g) Secrecy: All the important decision are taken by the sole proprietor himself/herself.
He/she keeps all the business secrets only with himself/herself. Business secrets are
important for small business to grow and avoid the competitors to enter into the same
business.
 (h) No Separate Entity: The sole proprietorship business does not have an entity separate
from the owner. The sole proprietor and the business enterprise are one and the same. The
sole proprietor is responsible for everything that happens in his/her business unit.
(i) One-Man Control: The management and controlling power of the sole proprietorship
business always remains with the owner. He/she prepares various plans and executes them
under his/her own supervision. He/she runs the business as per his/her own will.
(j) Area of Operations: As the sole proprietor has limited resources and managerial abilities,
sole proprietorship business has usually limited areas of operations. He/she can provide
limited funds only and can supervise a small business.

4. What are the features of Limited Liability Partnership?

A. According to Section 3 of the Limited Liability Partnership Act, 2008, “an LLP is a body
corporate formed and incorporated under the Act. It is a legal entity separate from its
partners”

Features of Limited Liability Partnership:

1) Limited Liability: The important feature of LLP is the liability of partners is limited to the
extent of their share. The private property of the partners may not be utilized to meet
liabilities of the business.
2) Separate Legal Entity: Limited Liability Partnership is a separate legal entity as like as a
company. The partners and firm are not one and the same, they are separate. One can register
property in the name of LLP and it can undertake contracts with outside parties on behalf of
the business.
3) Number of Members: Every LLP shall have at least two persons to form the business. At
any point of time, at least one designated partner should be a resident of India. There is no
limit on the maximum number of partners in the LLP.
4) Perpetual Succession: Unlike a partnership firm, an LLP can continue its existence even
after the death, retirement, insanity, or insolvency of one or more partners. Moreover, it can
enter into contracts and hold property in its name. Thus, LLP has perpetual succession.
5) Mutual Rights and Duties: Mutual rights and duties of the partners within the LLP are
governed by an agreement between the partners or between the partners and LLP as the case
may be. The LLP however, is not relieved of the liability of its other obligations as a separate
entity.
 6) Not Liable for Unauthorized Acts: No partner is liable on account of the independent or
unauthorized actions of other partners. Thus, individual partners are shielded from joint
liability created by another partner’s wrongful business decision and misconduct.

5. Define Co-operative Society and Explain its Features.

A. A cooperative society is an economic enterprise set up by economically weak individuals to
combat capitalistic monopolies. It is organised with the main object of , service, to its
members. The main principle of co-operative enterprise is self help through mutual help.

DEFINITION :

The co-operative societies Act 1912 defines a cooperative organisation as “A SOCIETY

WHICH HAS ITS OBJECTIVES,. THE PROMOTION OF THE INTEREST OF ITS MEMBERS
IN ACCORDANCE WITH THE PRINCIPLES OF COOPERATION”.

Features : The following are the features of cooperative society.

1. Voluntary Association :

A co-operaftve society is a voluntary association of persons. Membership is opened to aft, A

person can join as a member whenever he likes. He can also leave the society whenever he
wants.

2. Equality :

In co-operative society all persons are equal. Every mermber has only one vote irrespective
of the shares held by him. One man one vote is the most important principle of a cooperative
society.

3. Service Motive :

The aim of a cooperative society is to provide service to its members. The aim is not to earn
profits. Service is the primary objective and profit is the secondary objective.

4. Membership :

The minimum number of a cooperative society is 10 and the maximum is unlimited. The
member must have the contractual ability.

5. Democratic Management :

Cooperative societies are managed on democratic lines. Every member has only one vote. So
every one has equal voice in the management of the cooperative society.
6. Cash Trading·

The business of a cooperative society is generally based on cash basis. Credit is not allowed.
As a result there will be no bad debts and collection charges.

7. Registration :

Every co-operative society must be registered under the Indian Co-operative Societies Act
1912 . Without registration cooperative society cannot come into the existence.

8. Separate legal entity :

When a co-opertive society is registered, it becomes a body corporate like a joint stock
company, has a separate legal existence.

9. Distribution of profits :

The entire profits of the society will not be distributed among its members. A ceiling is fixed
on the rate of dividend payable to members.
6. Explain the difference between Partnership Firm and Joint Stock Company.
A

Sl. Items ofPartnership Firm Joint Stock Company

N Difference
1 The Acts It is governed by the Indian It is organised and monitored by
Partnership Act 1932 the provisions of Company Act 2013

2 Registration It is not compulsory, but it can enjoy It is compulsory In the absence of

certain privileges if registered registration, it can’t commence its
business.
3 Commenceme It can start its business after A private company cant’s start its
nt of Business entering into an agreement without business without obtaining certificate
registration also. of incorporation form from the
register. A public company has to
obtain both certificate of incorption
and commencement of business.
4 Number The minimum members required is In case of Private company ,minimum
of Members two and maximum is 10 in case of members required is two and
banking business and 20 in maximum I 50. But in case of public
case of non banking business. company th minimum members are 7
and there is no ceiling for maximum
members.
5 Legal Status It has no separate legal entity It has a separate entity and distinct
from its members.
6 Liability The liability of partners is unlimited The liability of members is limited to
and they are jointly and the extent of their share values. They
individually responsible for are not personally liable
liabilities of the firm
7 Transfer of A partner can transfer his share only There is no restriction on the transfer of
shares with the consent of all other partners shares of a public company and in
of the firm . private company shares can’t be
transferred
8 Management It is managed and controlled by the It is managed by Board of Directors and
partners and each of them can members can’t participate in day to
canparticipate in business operation day activities of the company
9 Stautory There are no rules and regulations It must maintain the prescribed books
Regulations with regard to maintaining books and have a periodically audit. It
and accounts should give requisite information to
the Register of companies also
10. Existence It is wound up on the death, It is not affected by shareholder death
retirement or insolvency of the of insolvency It exists continuously
partners. Hence existence of the
firm in uncertain.
7. State the Rights and Duties of a Partner.

A. Rights of a Partner

1. Right to take part in the conduct and management of the firm’s business

2. Right to be consulted and expressed his option on any matter related to the firm

3. Right to have access to inspect and copy any books of accounts and records of the
firms.

4. Right to have an equal share in the profits of the firm , unless and otherwise agreed by
the partners

5. Right to receive interest on loan and advances made by partner to the firm

6. Rights to be indemnified for the expense incurred and losses sustained by partner to
the firm.

7. Right to the partnership property unless and otherwise mentioned in the partnership
deed.

8. Ever partner has power or authority in an emergency , to do any such acts, for the
purpose of protecting the firm from losses.

9. Right to prevent the introduced of a new partner without the consent of other partners.

Duties of a Partner .

1. He should act diligently and honestly in the discharge of this duties to the maximum
advantage of all the partners

2. He should act in a just and faithful manner towards other partners.

3. He should bound to share the losses of the firm equally unless and otherwise agreed
upon by all partners.

4. He should indemnify the firm against losses sustained due to his wilful negligence in
the business.

5. He must maintain true and correct accounts relating to the firm’s business

6. No partner should make secret profits by way of commission or otherwise from the
firms business.

7. Every partner is bound to keep and render true and proper accounts of the firm to his
 co partners.

8. No partners is allowed to assign or transfer his rights and interest in the firms to an
outsider without the consent of other partners.

9. A partner is not entitled to claim any remuneration in the conduct of the business of
the firm, However it is usual to allow some remuneration to working partners by specific
agreements.

10. A partner must not carry on nay business which is similar to or likely to complete
with the business of his current partnership firm.

8. Explain relationship between Industry, Trade & Commerce.

A. Industry, Trade and Commerce are inter related to each other. Industry is related to
production of goods and providing of services. Commercial activities are nor possible
without industry. Hence commerce is dependent on industry.

Commerce is collected with distribution of goods and services. Industry and production
cannot survive in the absence of commerce. The goods produced must reach the ultimate
consumers. Commerce helps in the distribution of goods to users. This will help industry.
Hence both industry and commerce depend upon each other.

Industry provides a base to commerce. Commerce help industry in its development, trade
involves buying and selling of goods. It is a channel for transfer of goods from produces to
consumers. Trade provides a fundamental for the development of commerce.

The development of trade at international level helped industry increasing the volume of
production on the other hand the increased production of goods has increased the volume of
trade. Thus there is a link and dependence of industry, commerce and trade (or) each other.

9. Explain the difference between Professional Activities, Business Activities, and

Employment Activities.

A. The economic activities of human beings can be classified into three types. They are

1) Profession activities 2) Employment activities 3) Business activities

1) Profession activities :

These activities involve providing of personal services of expert nature. The services
rendered by Doctors, Lawyers, Charted Accountants are professional activities. To perform
 these activities, it requires proper educational qualification and training. Without these
professional activities cannot be performed.

2) Employment activities :

The activities performed by an employee as per the employment agreement are called
employment activities. The employment agreement will be in between the employer and the
employee. Employee performs the work on behalf of employer. For the activities performed,
the employee receives remuneration from the employer. It may be in the form of salary or
wages.

3)Business activities :

The human activities which involve production or purchase of goods or sale of goods with
an object of making profits are known as business activities. If the person carries the
production or purchases of goods and services for himself. It can not be considered as
business. If production or purchase of goods is carried for making the sale to outsiders with
an object of earning profits is considered as Business. It is a continuous process.

10. Define Trade and explain different types of Trade.

A. Trade refers to sale, exchange of goods and services. It involves the buying and selling of
goods and services. Persons who conduct trade are called traders, Trade may be classified
into two types :
(1) Home Trade (2) Foreign Trade
1) HOME TRADE : If the trade is carried within the boundaries of a country, that trade
is called ‘Home Trade’. It is also known as domestic trade or internal trade or inland
trade, internal trade may be classified into wholesale trade and retail trade.
a) Wholesale Trade : If the goods are purchased from the manufacturer and sold to
retailer, such a trade is called “Wholesale Trade”. Person who carries the whole sale
trade is called “Wholesaler”.
b) Retail Trade : If the trade involves purchase of goods from the wholesaler and selling
the same to the consumer such a trade is called “Retail Trade” person who carries the
retail trade is known as “Retailer”,
The further classification Home Trade may be as follows :
 a) Local Trade : When the demand for product is limited only to a particular place, then
that type of trade is called “Local Trade”. Here buying and selling is restricted to one
place.
(b) State Trade : When the trade is limited to the boundaries of the state, it is called “State
Trade”:
(c) Interstate Trade :- The trade conducted throughout the country but with in the
national boundaries is called “interstate Trade”.
2) FOREIGN TRADE : If trade takes place in between the citizens of two different
countries, such a trade is called “Foreign Trade”. Foreign Trade may be in any of the
following ways.
a) Export Trade :- If one country sells the goods to other country, such a trade is “Export
Trade. Export Trade is possible if the goods are produced beyond the need of
consumption.
b) Import Trade : If goods are purchased from other countries for the consumption, such
a trade is called ‘Import Trade’. When the goods are not available in the Home
Country, import Trade takes place.
(c) Entrepot Trade (Re-Export Trade) : If goods purchased from one country if sold to
other countries, such a trade is called ‘Entrepot Trade’. Here the goods are imported
not for home consumption but for the re-export to the other countries.
Ex : If coffee grains are imported from Brazil and the same are Exported to Japan
such a trade is called Entrepot Trade.
11. Define Aids to Trade and explain types of Aids to Trade.

A. There are some difficulties or hindrances in the exchange of goods. By these business become
difficult and expansion is limited. To overcome these hindrances, facilities which are
provided are known as Aids to Trade. The following are the various aids to trade provided
tor the business.
1) Transportation : It is the process of carrying goods and passengers from one place to
another. Through transport, it is possible to supply the goods to the places of
consumption. Transportation creates place utility. There are various modes of
transport such as Road, Sea, Air. Transportation eliminates the hindrance of distance.
2) Ware Housing : Ware Housing is the preservation of goods until they are finally
consumed. Since there is a time lag in between the point of production and the time
 point of consumption goods are to be protected properly. For this ware housing
creates time utility. The hindrance of time is removed by ware houses.
3) Insurance : During transportation and storage goods are subjected to several types of
risks. Goods may be stolen or damaged. Fire, Floods, Earthquake etc. may result in
the destruction of goods. The fear of loss of goods acts as an obstacis in the
development of trade. Insurance removes, this hindrance by covering the risk of loss.
Packaging also helps to protect the goods during transit and storage.
4) Banking : Banks are readers of money and credit. They help in buying and selling of
goods by providing finance. Banks also grant credit to the traders with which they can
carry all large volume of trade. So, banks help in overcoming financial problems.
5) Advertising : Advertising helps in informing the consumers about the availability and
usefulness of various products in the market. In the trade the absence of information
about products is a great hindrance. Advertising helps to remove the hindrance of
knowledge.

12. Explain the difference between Equity Shares and Preference Shares.

A.

Basis of Difference Preference Shares Equity Shares

1) Choice to issue It is not compulsory to issue
these shares these shares.
2) Payment of Dividend is paid before
dividend Paying dividend on equity
shares.
3) Return of Capital In case of winding up capital
is repaid before the payment
of equity share capital.
4) Voting Rights Limited voting rights.
5) Rate of dividend Rate of dividend prefixed
and pre communicated.
6) Speculation No scope for speculation.
7) Trading on equity Enable the company to trade
on equity.
8) Risk Less risk.
9) Bonus Shares Bonus shares are not offered
to preference shareholders.
10) Participation in The preference shareholders
management have no right to participate in
the management.
It is compulsory to issue these
shares.
Dividend is paid after paying
dividend on preference shares.
In case of winding up capital is
refunded after the payment of
preference share capital.
Absolute voting rights.
Dividend rate is not fixed and it
is recommended by the Board of
Directors.
Scope for speculation.
Company cannot take
advantage of trading on equity.
High risk.
Bonus shares are offered to
equity shareholders.
The equity shareholders as
owners of the company can
participate in the management.
13. Explain the difference between Shares and Debentures.

A. The following are the differences in between shares and debentures.

1. Meaning : A share is a part of capital where as a debentures is a part of loan. Debenture is

an acknowledgement of debt.

2. Interest or Dividend : Share holders are paid dividend on the shares held by them. Whereas
debenture holders are paid interest.

3. Volume of Benefits : The rate of dividends depends on the volume of profits in shares.
Variable dividends are paid to the share holders. Whereas a fixed rate of interest is paid on
debentures irrespective of profit.

4. Earning of Profits : To make the ‘payment of dividends to share holder, the company has
to earn profits whereas whether the company earns profit or sustains loss, interest at fixed
rate be paid to debenture holders.

5. Nature of holders : Share holders are the real owners of the company. They have control
over the management of the company Whereas debenture holders are only creditors of the
company. Hence, they do not have control over management.

6. Repayment of Principal Amount : Shares are not redeemable during life time of the
company. Debentures are redeemable after a certain period.

7. Priority in Repayment : At the time of liquidation the, principal amount on debentures is

repaid before the repayment of the capital to the share holders i.e.., first preference is given
to the debenture holders and second preference is given to the share holders in the
repayment.

8. Type of the security : Shares are treated as ownership securities whereas debentures are
treated as creditor ship securities.

14. Define MNC and explain its features.

A. A corporation that controls production facilities in more than one country is known as
Multinational Corporation. Such facilities are acquired through the process of foreign direct
investment. Today there are 500 to 700s Multinational corporations in the world. Half of them
are U.S.'s Multinationals and the rest are belonging to U.K., West Germany, Japan, France,
Switzerland and Canada.
 The essential features of a MNC is that headquarters are located in home country and they
carry operations in a number of other countries i.e. host countries.

Characteristics of MNCs:

a) Giant size: The sales and assets of MNCs are quite large. Hence they earn supernormal
profits.
b) Global operations: MNCs carry production and marketing operations in different
countries of the world. They posses all the infrastructural facilities.
c) Centralized Control: MNC has its headquarters in the home country. It exercises control
over all branches and subsidiaries.
d) Dominant position and status: MNCs carry on operations in bulk and cover many
people. Hence they control the market and enjoy a dominant position and status in all
operated countries.
e) Sophisticated Technology: Generally MNCs had advance technology so as to produce
quality goods and services to the consumers.
f) Professional management: MNCs employ professional trained managers to integrate
and manage world wide operations to maximize profits.
g) International research and development: MNCs internationalize their research and
development operations in order to capture the market of the host countries.
h) Easy Entry: MNCs can enter into any country easily with their huge capital, technology
and managerial skills.
i) Higher Revenues: MNCs generate huge revenues with their large size sales and benefits
of largescale economies.

15. Explain the Registration Process of MSME’s.

A. The steps involved in the registration process are:

1. Complete the MSME form: Applicants are required to fill in all the details and submit the
requested documents.

2. Preparation of Documents: Their experts will help in drafting the application and prepare
documents for registering MSME as per the requested details. The process requires 1-2
working days to proceed to next level. The various documents required for registration are
business address proof, copies of sale bill and purchase bill, partnership deed/MA, AA ,
copies of licenses and bills of Machinery purchased.
 3. Filling MSME Application: Post the documents are prepared and submitted to MSME
registrar; their experts will verify the submitted documents. This procedure requires another
2 working days.

4. Application Approval and Registration: Once MSME application is approved, company

gets registered and related documents shall be sent to the company.

5. Registration Criteria: Enterprises in manufacturing or services sector need to have less than
Rs 50 crore of investment in plant and machinery.

16. Explain the Advantages and Disadvantages of MNC.

A. MNCs directly and indirectly help both home country and the host country. Various
advantages of MNCs are explained below.

Advantages:

1. Economic Development: The development countries need both foreign capital and
technology to make use of available resources for economic and industrial growth.
MNC’s can provide the required financial, technical and other resources to the needy
countries in exchange for economic gains.
2. Technology Gap: MNCs are the instruments of transfer of technology to the host
country. Technology is necessary to bring down cost of production and produce
quality goods on a large scale. The services of NMCs can be of great help to bridge the
technological gap between developed and developing countries.
3. Industrial Growth: MNCs are dynamic and offer growth opportunities for domestic
industries. MNCs assist local producers to enter the global markets through their well
established international network of production and marketing and thereby ensure
industrial growth.
4. Marketing Opportunities: MNCs have access to many markets in different countries.
They have the necessary skills and expertise to market products at international level.
For example, an Indian Company can enter into Joint Venture with a foreign company
to sell its products in the international market.
5. Work Culture: MNCs introduce a work culture of excellence, professionalism and
transparency in deals. The primary objective of multinational company is to maximise
the profit and increase the market share. In order to achieve this, the multinationals
 use various strategies like product innovation, technology upgradation, professional
management etc.

Disadvantages:

1. Problem of Technology: Technology developed by MNCs from developed countries does

not fully fit into the needs of developing countries. This is because, such technology is
mostly capital intensive.
2. Political Interference: The MNCs from developed countries are criticised for their
interference in the political affairs of developing nations. Through their financial and
other resources, they influence the decision-making process of the government of
developing nations.
3. Self-Interest: MNCs work towards their own self-interest rather than working for the
development of host country. They are more interested in making profits at any cost.
4. Outflow of foreign Exchange: The working of MNC is a burden on the limited resources
of developing countries. They charges high price in the form of commission and royalty
paid by local subsidiary to its parent company. This leads to outflow of foreign exchange.
5. Exploitation: MNCs are criticised for exploiting the consumers and companies in the host
country. MNCs are financially very strong and adopt aggressive marketing strategies to
sell their products, adopt all means to eliminate competition and create monopoly in the
market.

17. Define Industry and explain different types of Industries.

A. Industry refers to the production of goods. The association of all activities which are related
to the production of goods and services is also called as industry.

DEFINITION :

Industry may be defined as “that part of business activity which concerns itself with the raising,

Production, processing or fabrication of products”.

The goods produced by the industry may be classified into two types:

a) Consumer goods b) Producer goods

Industry is the back bone of commerce and trade. The growth and development of trade and
commerce depends on the development of industry.
Types of Industries:

Basing on the nature of goods produced, Industries may be classified into five types. They
are :

1. Extractive industries:

Extraction means taking out. If an industry is engaged in the extraction of natural wealth
from the earth (or) from he forests (or) from the water is known as extractive industry.

Eg : Agriculture, fishing, hunting, mining are extractive industries the products of extractive
industries are used as the raw material in other industries.

2. Manufacturing industries:

An industry in which the raw material is converted into the finished product is known as
manufacturing industry. It uses the raw materials of genetic industries and construction
industries.

Eg : cloth industry, furniture industry etc.

3. Genetic Industries:

Genetic means heredity or parentage. If an industry is engaged in the reproduction and

multiplication of certain species of plants or birds or animals and sells them for profit, are
called Genetic industry.

Eg : Poultry forms, aqua forms, sheep breading centers etc.

4. Construction industries:

An industry which is engaged in the construction of roads, buildings, dams, bridges etc is
called construction industry. Cement, sand, bricks, iron, wood etc are used as materials for
the construction of roads, buildings etc.,

5. Service industries:

An industry which provides services to the people is known as service industry. These
industries provides services rather than goods.

Eg : Education institutions, hospitals, telecommunication, libraries. In the developed

countries like U.K. and U.S.A. more than 70% of the people are working in service industries.
These industries yield a major part of national income to the government.

Industries are classified in two types. They are :

 1)Heavy industry

2)Light industry

Heavy industry :

An industry which undertakes the production of heavy engineering goods is called heavy
industry. Large amount of capital is required for these industries. The latest technology is
employed (used) in these industries.

Eg : BHEL (Bharat Heavy Electrical Limited)

TISCO(Tata Iron and Steel Company)

Light industry :

An industry which undertakes the production of light goods is called light industries. They
require less amount of capital and uses ordinary technology.

Basing on the scale of production, capital and number of employees industries can be
classified into three types.

These are : 1) Large scale Industries

2) Medium scale Industries

3) Small scale industry Industries

18. Define Promoter and explain his functions.

A. A promoter is a person who does the necessary preliminary work incidentally to the
formation of a company. The first persons who control a company’s affairs are its promoters.
It is they who take the necessary and incidental preliminaries, keeping in view the object to
bring into existence and incorporate the company. They provide with share and loan capital
and acquire the business or property which it is to manage. When these things have been
done they hand over the control of the company to its directors. These entrepreneurs are often
called as Promoters.

Functions of a Promoter:

A promoter is one who undertakes to form a company. He is instrumental in bringing a

company into existence. Promoter may be an individual, a firm, an association of persons, or
a company. The promoter take lead for bringing men, money material and machinery
together for establishing an enterprises. Promoter performs the following functions.
 1. A promoter conceives an idea for the setting up of a business.
2. He/she makes preliminary investigation and ensures the future prospects of business.
3. He/she brings together various individuals who agrees to associate with him/her and
share the business responsibilities.
4. He/she prepares various documents and gets the company incorporated.
5. Promoter raises the required finances and gets the company going.
6. He gets into an agreement to acquire and obtain assets for the company.

19. Explain the differences between Memorandum of Association and Articles of Association.
A.
Memorandum of Association
1) Nature: Memorandum is the character of
the company. It defines the objects and
scope of the company.
2) Scope: It defines the relationship
between the company and outsiders.
3) Contents: It contains the objects and
powers of the company.
4) Filling: At the time of Incorporation
filing of memeorandum is compulsory.
5) Status: Memorandum is subordinate to
Companies Act.
6) Alteration: It can be altered only under
special circumstances with the prior
approval of and central govt. court.
7) Legal effects: The legal effects are more
harsh on memorandum Companuies Act
regulated it.
Articles of Association
It is a subsidiary document and contains
the rules and regulations for the internal
management of the company.
It defines the relationship between and its
members and also the relationship among
the members themselves.
It lays down the rules by which those
objects are achieved.
The filing of articles is optional. A public
company need not file it. It can adopt rules
stated in table A.
Articles of Association is subordinate to
both Memorandum and Companies Act.
It can be altered by passing special
resolution of the shareholders. In some
cases only the approval of the central govt.
required.
The legal effects are less on artilces. The
shareholders can modify the Articles and
ratify it.

20. Explain about Partnership Deed.

A. Partnership is the result of an agreement. The agreement may be in oral form or in written
form. It always desirable to have the agreement in writing. The written form of partnership
agreement containing terms and conditions of partnership is called partnership deed or
Articles of partnership.
 A partnership deed Includes all important clauses of the partnership business, The deed has
to be stamped and registered as per the Partnership Act 1932. Each partner should have a
copv of deed with him. The deed must be signed by all the partners. The deed every useful
in setting the future disputes of the partners.

Contents of Partnership Deed :

A partnership deed induces the following points or clauses:

1. The name of the firm.

2. The Address of the Partnership firm.

3. Names and Addresses of the Partners.

4. The Nature of business.
5. Capital contributed by all partners.
6. Rate of interest on Capital
7. Limits of drawings.
8. Interest on drawings.
9. Duties, rights and obligations of partners.
10. Method of preparing accounts.
11. Profit sharing ratio of partners.
12. Procedure to be followed at the admission of a partner,
13. Revaluation of assets and liabilities on admission or death or retirement of a partner.
14. Method of arbitration to settle disputes among partners.
15. Arrangements in case of insolvency of a partner.
16. sSalary or commission payable to managing partner.

21. Explain Advantages & Disadvantages of Equity Shares.

A. Advantages: The important merits of raising funds through issuing equity shares are given
below

1. Equity shares do not create any obligation to pay a fixed rate of dividend.

2. Equity shares can be issued without creating any charge over the assets of the company.

3. It is a permanent source of capital and the company need not repay it except under
liquidation.

4. Equity shareholders are the real owners of the company who have the voting rights.
 5. In case of profits, equity shareholders are the real gainers by way of increased dividends
and appreciation in the value of shares.

Disadvantages: The major limitation of raising funds through issue of equity shares are as
follows

1. Investors who want steady income may not prefer equity shares as equity shares get
fluctuating returns
2. The cost of equity shares is generally more as compared to the cost of raising funds through
other sources.
3. Issue of additional equity shares dilutes the voting power and earnings of existing equity
shareholders.
4. More legal formalities and procedural delays are involved while raising funds through
issue of equity shares.

22. Explain Advantages & Disadvantages of Preference Shares.

A. Advantages: The merits of preference share are given as under

1. Preference shares provide reasonably steady income in the form of fixed rate of return and
safety of investment.

2. Preference shares are useful for those investors who want to get fixed rate of return with
comparatively low risk.

3. It is a superior security over equity shares.

4. Payments of fixed rate of dividend to preference shares may enable a company to declare
higher rates of dividend for the equity shareholders in good times.

5. Preference shareholders have a preferential right of repayment over equity shareholders

in the event of liquidation of a company.

6. Preference capital does not create any sort of charge against the assets of a company.

Disadvantages: The major limitations of preference shares as a source of business finance are
as follows

1.Preference shares are not suitable for those investors who are willing to take risk and are
interested in higher returns.
2.Preference capital dilutes the claims of equity shareholders over assets of the company.
 3.The rate of dividend on preference shares is generally higher than the rate of interest on
debentures.
4.As the dividend on these shares is to be paid only when the company earns profit, there is
no assured return for the investors. Thus, these shares may not be very attractive to the
investors.

23. Explain Advantages & Disadvantages of Debentures.

A. Advantages: The merits of raising funds through debentures are given below

1. Debentures are preferred by investors who want fixed income at lesser risk.

2. Debentures are fixed charge funds and do not participate in profits of the company.

3. The issue of debentures is suitable in the situation when the sales and earnings are
relatively stable.

4. As debentures do not carry voting rights, financing through debentures does not dilute
control of equity shareholders on management.

5. Financing through debentures is less costly as compared to cost of preference or equity

capital as the interest payment on debentures is tax deductible.

Disadvantages Limitation of raising funds through Debentures are as follows

1. As fixed charge instruments, debentures put a permanent burden on the earnings of a

company. There is a greater risk when earnings of the company fluctuate.
2. In case of redeemable debentures, the company has to make provisions for repayments on
the specified date, even during periods of financial difficulty.
3. Each company has certain borrowing capacity. With the issue of debentures, the capacity
of a company to further borrow funds reduces.