FORMS OF BUSINESS ORGANISATION

This page contains the NCERT Business Studies class 11 chapter 2 FORMS OF BUSINESS ORGANISATION from Part 1 Foundations of Business. You can find the solutions for the chapter 2 of NCERT class 11 Business Studies, for the Multiple Choice Questions, Short Answer Questions, Long Answer Questions and Application Questions in this page. So is the case if you are looking for NCERT class 11 Business Studies related topic FORMS OF BUSINESS ORGANISATION question and answers.

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Multiple Choice Questions

Tick the Appropriate answer

The structure in which there is separation of ownership and management is called

(a)

Sole proprietorship

(b)

Partnership

(c)

Company ✔

(d)

All business organisations

The karta in Joint Hindu family business has

(a)

Limited liability

(b)

Unlimited liability ✔

(c)

No liability for debts

(d)

Joint liability

In a cooperative society the principle followed is

(a)

One share one vote

(b)

One man one vote ✔

(c)

No vote

(d)

Multiple votes

The board of directors of a joint stock company is elected by

(a)

General public

(b)

Government bodies

(c)

Shareholders ✔

(d)

Employees

Profits do not have to be shared. This statement refers to

(a)

Partnership

(b)

Joint Hindu family business

(c)

Sole proprietorship ✔

(d)

Company

The capital of a company is divided into number of parts each one of which are called

(a)

Dividend

(b)

Profit

(c)

Interest

(d)

Share ✔

The Head of the joint Hindu family business is called

(a)

Proprietor

(b)

Director

(c)

Karta ✔

(d)

Manager

Provision of residential accommodation to the members at reasonable rates is the objective of

(a)

Producer’s cooperative

(b)

Consumer’s cooperative

(c)

Housing cooperative ✔

(d)

Credit cooperative

A partner whose association with the firm is unknown to the general public is called

(a)

Active partner

(b)

Sleeping partner

(c)

Nominal partner

(d)

Secret partner ✔

Short Answer Questions

1. Compare the status of a minor in a Joint Hindu family business with that in a partnership firm.

The following is the comparison of the status of a minor in a Joint Hundu family business with that in a partnership firm.

Basis

Joint Hindu Family

Partnership Firm

1. Membership

A minor becomes a member by birth.

As per Partnership Act, 1932, a minor can not be a partner in a partnership firm. However, a minor can be admitted as a partner with the mutual consent of all other partners.

2. Ownership

Enjoys equal ownership rights in the business similar to other members of the family.

A minor can share the profits of the firm but is not obliged to contribute to the capital.

3. Liability

His/Her liability is limited to the extent of his share in the business.

He/She is not liable to bear the losses incurred by the business.

4. Ownership after minority age

Continues to be a partner along with other members of the family.

Once he/she becomes 18 years old, he/she has the option to remain as a partner or retire from being a partner in the firm.

2. If registration is optional, why do partnership firms willingly go through this legal formality and get themselves registered? Explain.

When not registered, a business would have to bear the following consequences.

(a)

A partner of an unregistered firm cannot file a suit against the firm or other partners.

(b)

The firm cannot file a suit against third parties.

(c)

The firm cannot file a case against the partners.

So, the partnership firms willingly go through this legal formaility and get themselves registerd, even though the registration is optional.

3. State the important privileges available to a private company.

The following are the important privileges available to a private company (as compared to a public company):

1. Less number of partners/members: The minimum number of partners to start a private company is only two. So, a private company can be relatively easily started as compared to a public company which requires minimum seven partners to start with.

2. Need to raise the capital: A private company need not raise the capital from the public.

3. Commencing the business: In a private company, the business can be started as soon as the certification of incorporation is procured. Whereas, a public company should wait until procuring the certificate of commencement along with the certificate of incorportation to start the business.

4. Number of Directors: A private company requires only two directors whereas a public company needs minimum three directors.

5. Maintenance of Index of Members: A private company need not maintain an index of the members like a public company.

6. Issuing of Loans to Directors: In a private company, loan can be issued to the directors whereas in a public company it requires permission from the government to issue loans to directors.

4. How does a cooperative society exemplify democracy and secularism? Explain.

A cooperative society exemplifies democracy and secularism in the following ways:

Just like the democracy, the members of the cooperative society elect the managing committee.

Every member is eligible to cast one vote. The number of votes casted by a member is not based on the capital contributed by the person. Thus each member’s decision has equal weight in decision-making process. Thus the ‘one-man one-vote’ principle governs the corporate society.

The members are free to join at anytime and are allowed to leave the corporate society at any time.

Every member enjoys equal rights irrespective of their religion, region, caste and sex. Thus the corporate society maintains a secular atmosphere.

5. What is meant by ‘partner by estoppel’? Explain.

A partner by estoppel is a person who is taking own initiative, conduct or hehave in such a manner that it gives an impression to others that he/she is a partner of the firm. A parnter by estoppel will be held liable for the debts of the firm. This is because in the eyes of the third party, these are partners of the firm, even though they do not contribute any capital or take part in the management of the business.

6. Briefly explain the following terms in brief.

(a)

Perpetual succession

(b)

Common seal

(c)

Karta

(d)

Artificial person

The following is the explanation of the given terms in brief.

(a)

Perpetual Succession: A company being a creation of the law, can be brought to an end only by law. It will only cease to exist (or terminated) when a specific procedure for its closure, called winding up, is completed. Members may come and members may go, but the company contiues to exist. This is called Perpetual Succession

(b)

Common Seal: A common seal is the signature of the company. Any documents bearing this seal are officially considered to be documents of the company. A company may or may not have a common seal. If a company has a common seal, it must be affixed to the documents such as agreements of a company. If a company does not have a common seal then the person signing the document should be authorised by a board’s resolution.

(c)

Karta: Karta is the eldest member/head of the Joint Hundu Family business. Karta controls and manages the affairs of the business. Karta has unlimited liability.

(d)

Artificial Person: A company is a creation of law and exists independent of its members. Similar to a natural person, a company can

●

own property

●

incur debts

●

borrow money

●

enter into contracts

●

sue

●

and can be sued.

However, unlike a natural person, a company can not breathe, eat, run, talk and so on. Hence, it is called as an Artificial Person.

Long Answer Questions

1. What do you understand by a sole proprietorship firm? Explain its merits and limitation?

Sole proprietorship refers to a form of business organisations which is

●

Owned

●

Managed

●

and controlled

by an individual who is

●

the recipient of all the profits

●

and bearer of all the risks

It is clear from the term Sole Proprietorship itself. In this the Sole implies Only and proprietor refers to Owner of a business.

Sole Proprietorship is a popular form of business organisations and is the most suitable form for small businesses, especially in their initial years of operation.

Even though this form of business organisations have various shortcomings, it is due to its inherent advantages that many entrepreneurs prefer to have this form of business. It requires less amount of capital and is best suited for businesses which are carried out on a small scale and where customers demand personalised services.

The important characteristics of sole proprietorship form of business organisations are as follows:

(i)

Formation and Closure: As there is no separate law that governs the sole proprietorship and as there are hardly any legal formalities that are required to start this form of business, except that in few cases a licence is required, there is ease in formation as well as closure of the business.

(ii)

Liability: Sole proprietors have unlimited liability. So, the owner is personally responsible for payment of debts in case the assets of the business are not enough to meet all the liabilites.

(iii)

Sole risk bearer and profit recipient: The sole proprietor has to bear all the risk. On the otherhand, if the business is successful, the proprietor enjoys all the benefits. Being able to enjoy all the profits is a direct reward for the risk bearing.

(iv)

Control: The sole proprietor has the right to run the business and is responsible for all the decisions. There is no one else to object the execution of his plans.

(v)

No Separate entity: The law treats the sole proprietor and his business as one and the same. In otherwords, the business does not have a separate identity. So, the owner will be responsible for all the activities of the business.

(vi)

Lack of business continuity: As the sole proprietorship business is owned and controlled by only one person, in case of

●

death

●

insanity

●

imprisonment

●

bankruptcy

the business will be directly impacted. It will have a harmful effect on the business and can even lead to closure of the business.

Merits of Sole Proprietorship:

The following are some of the merits/advantages of sole proprietorship.

(i)

Quick Decision making: The sole proprietor is free to make decisions regarding the business. The decision making is prompt/without any delay as there is no need to take approval from others. This helps to capture the market opportunities and capitalise them, as and when they arise.

(ii)

Confidentiality of Information: As the sole proprietor is the decision maker, the information related to the business operations will remain confidential and stays in secrecy. In addition, the law does not require the sole proprietor to publish the firm’s accounts to the public.

(iii)

Direct Incentive: The sole proprietors reap all the benefits of the business as they are the sole recipients of all the profits. As they’re the single owners, they don’t have to share the profits with others. This provides them maximum incentive/motivation to work hard.

(iv)

Sense of accomplishment: When someone is working for themselves (being their own boss), it gives them personal satisfaction. They know that they are totally responsible for the success of the business. This gives them

●

self-satisfaction

●

a sense of accomplishment

●

and confidence in their abilities.

(v)

Ease of formation and closure: An important merit of sole proprietorship is the possibilitiy of starting the business with minimal legal formalities. There is no separate law that governs the sole proprietorship. Due to less number of regulations, it is easy to start and close the business as per the wish of the owner.

Demerits of Sole Proprietorship:

The following are some of the limitations/demerits/disadvantages of sole proprietorship:

(i)

Limited resources: The resources available to a sole proprietor are limited to their personal savings and borrowings from others. Banks and other lending institutions may hesitate to extend a long term loan to a sole proprietor. This limitation is one of the major reasons why the size of the business rarely grows much and generally remains small.

(ii)

Limited life of a business concern: As the sole proprietorship business is owned and controlled by only one person, in case of

●

death

●

insanity

●

imprisonment

●

bankruptcy

the business will be directly impacted. It will have a harmful effect on the business and can even lead to closure of the business.

(iii)

Unlimited Liability: Unlimited Liability is a major disadvantage of sole proprietorship. If the business fails, the creditors(if any) can recover their dues not just from the business assets, but also from the personal assets of the proprietors. Some poor decision or an unfavourable circumstance can create serious financial burden on the owner. Due to this reason, a sole proprietor is less likely to take risks in the form of innovation or expansion.

(iv)

Limited Managerial Ability: Various managerial tasks like

●

purchasing

●

selling

●

financing etc.

are the responsibilities of the sole proprietor. These are somany areas. It is very rare that one individual excel in all these areas. So, the decision making may not be balanced in all the cases. In addition, as the sole proprietor’s resources are limited, they may not be able to employ and retain talented and ambitious employees.

2. Why is partnership considered by some to be a relatively unpopular form of business ownership? Explain the merits and limitations of partnership.

As per The Indian Partnership Act, 1932, partnership is defined as the relation between persons who have agreed to share the profit of the business carried on by all or any one of them acting for all.

Despite the merits, a partnership form of business ownership is relatively unpopular due to the following limitations.

💡 These limitations are explained in detail in the limitations section.

(i)

Unlimited Liability

(ii)

Limited Resources

(iii)

Possibility of Conflicts

(iv)

Lack of Continuity

(v)

Lack of Public Confidence

Merits of Partnership: The following are the merits of partnership form of business organisation.

(i)

Ease of formation and closure: A partnership firm can be started easily by putting an agreement in place, between the prospective (to be) partners. In this agreement they agree to

●

carry out the business of the firm

●

and share risks.

Registration of the firm is not compulsary. Closure of the firm is also easy.

(ii)

Balanced decision making: Different partners can oversee different functions depending on the areas in which they have expertise. As there are different partners handling different activities and not just a single person, it leads to

●

reduction in the burden of work

●

few errors in judgement.

As a result, the decisions are more likely to be more balanced.

(iii)

More Funds: As the capital is contributed by a number of partners, it is possible to raise a larger amount of funds as compared to a sole propritorship. Due to this it becomes possible to undertake additional operations when needed.

(iv)

Sharing of risks: The risk associated with the business is shared by all the partners. This reduces

●

Anxiety

●

Burden

●

and Stress

on individual partners.

(v)

Secrecy: A partnership firm is not legally required to publish its accounts and submit its reports. Hence it is possible to maintain confidentiality of information related to the business operations.

Limitations of a partnership firm: The following are the limitations of a parntership firm.

(i)

Unlimited Liability: Partners are liable to pay debts even from their personal resources in case the business assets are not enough to pay the debts. The liability of the partners is both joint and several. This will be a drawback for those partners who have greater personal wealth. In case the other partners are not able to pay the debts, it is these wealthy partners who have to repay the entire debt.

(ii)

Limited Resources: Even though the partnership firm might procure more capital investment as compared to a sole proprietorship form of organisation, still it is not usually sufficient enough to support large scale business operations. This is due to the restriction on the number of partners that can be part of a partnership firm and this indirectly limits the capital investment that can be funded. Due to this reason, the partnership firms have limitations to grow beyond a certain size.

(iii)

Possibility of Conflicts: As a partnership firm is run by a group of persons, the decision making authority is shared among them. Difference in opinion on some issues may lead to disputes between partners. In addition, the decisions of one partner are binding the rest of the partners. Due to this, any mistake by one of the partners may lead to a financial ruin for the other partners. Also, in case any of the partners wants to leave the firm, it results in termination of partnership as there is a restriction on transfer of ownership.

(iv)

Lack of continuity: Pathership comes to an end with the

●

death

●

retirement

●

insolvency

●

lunacity

of any of the partners. It may result in lack of continuity. However, this can be overcome if the remaining partners enter into a fresh agreement and continue to run the business.

(v)

Lack of Public Confidence: A partnership firm is not legally required to publish its financial reports or make other related information public. So, it is difficult for any member of the public to ascertain the true financial status of a partnership firm. As a result, the confidence of the public in parntership firms is generally low.

3. Why is it important to choose an appropriate form of organisation? Discuss the factors that determine the choice of form of organisation.

The following is the reason why it is important to choose an appropriate form of organisation:

Selecting an appropriate form of business organisation is important as it influences various operational aspects of the business such as

●

decision making

●

distribution of profits

●

liability of owners

●

and business continuity

The choice of business form affects

●

the degree of control the owners have over the business

●

the amount of capial that can be raised

●

the legal formalities required for establishment

●

and distribution of profit among the owners.

Therefore, making the right choice is essential to align with the

●

business objectives

●

operational style

●

financial abiltites

●

and risk-bearing capacity

of the owners.

The following are the factors that determine the choice of form of organisation:

(i)

Cost and ease in setting up the organisation: The capital requirement and the procedural complexities involved in starting the business determine the choice of the business organisation. So, when the capital requirements are low as well as scale of operations are small, one may prefer sole proprietorship or partnership form of organisation. On the otherhand, when the capital requirements are high as well as scale of operations are also large, one may prefer setting up a company even though the legal requirements are lengthy and expensive.

(ii)

Liability: The factor of liability significantly influences the choice of the business organisation. The sole proprietorship and partnership form of businesses have unlimited liability whereas a joint stock company have limited liability. So, when someone prefers low risk, then a form of business with limited liability like a joint stock company might be preferred.

(iii)

Continuity: The continuity of the sole propritorship and partnership firms is affected by events like

●

death

●

insolvency

●

or insanity

of the owners. In other forms of organisations, any such events do not affect the continuity of the business. So, if the preference is to have a business that has permanent structure, then a company form is more suitable. On the other hand, for short term ventures, sole proprietorship or partnership may be preferred.

(iv)

Management Ability: In sole proprietorship, the owner has difficulty to get expertise help in all functional areas of managemnet. In other form of organisations there is no such problem. Different work related to different functional areas is divided among the members. So, as the work is handled by the managers who are specialists in that area, it leads to better decision making. On the other hand, it may lead to conflicts when people have difference of opinions. So, a company form of organisation is preferred only when the business operations are complex in nature. On the other hand if running the business involves simple and easier operations then a sole proprietorship form is preferable. Thus the nature of operations as well as the need to have professional management affect the choice of the form of organisation.

(v)

Capital considerations: The resources available to a sole proprietor are limited. Whereas in case of partnership and company form of organisations, it is easier to procure the funds at a much larger scale. So, if the scale of operations are large and demand huge capital, then a company form is suitable. Whereas if the scale of operations are small and does not need large funds then a sole proprietorship or partnership form of business can be adopted. In addition, as the company form is capable of procuring more funds easily, it is more preferable when expansion of business operations is planned.

(vi)

Degree of control: A sole proprietor have

●

direct control over operations

●

and absolute decision making power.

Whereas in partnership or company form of organisations, there is dilution of these factors. However, it has the advantage of complete separation of

●

ownership

●

and management.

In addition, professionals, who are experts in specific area can be appointed and they will manage the affairs of the company independently.

(vii)

Nature of business: Sole proprietorship is more suitable when the nature of the business is to have direct contact with the customers. Similarly, if the nature of the business demands professional services to customers then a partnership is preferred. Company form is suitable when the nature of the business does not demand any personal contact with the customer.

4. Discuss the characteristics, merits and limitation of cooperative form of organisation. Also describe briefly different types of cooperative societies.

Characteristics of cooperative form of organisation:

The following are the characteristics of a cooperative form of organisation:

Voluntary Membership: The membership to join a cooperative society is voluntary. Anyone is free to join and leave anytime as per their desire. There is no compulsion to join or quit the society. Though the formalities require someone to serve a notice before leaving, it is not compulsary to remain as a member. The membership is open to all irrespective of their

●

religion

●

caste

●

and gender

Legal Status: Registration of a cooperative society is mandatory. So, a cooperative society acquires a separate identity in the society. The identity of the society is different from its members. The society can

●

enter into contracts

●

hold property in its name

●

sue

●

and be sued by others.

As the society is a separate legal entity in its own, the entry or exit of any members does not affect its status.

Limited Liability: The liability of the members of a cooperative society is limited to the extent of their capital investment in the society. So, the maximum liability that the member is liable is equal to his/her capital.

Control: In the cooperative society, the members elect the managing committee. This managing committee holds the power to take decisions. Each member has the voting right to choose the members constituting the managing committe. So, the cooperative society is democratic in nature.

Service Motive: The cooperative society promotes the values of mutual help and welfare. Thus the primary motive of a cooperative society is service. The surplus generated as a result of its operations is distributed among the members as dividend in accordance with the by-laws of the society.

Merits of Cooperative Society: The following are the merits of the cooperative society.

Equality in voting status: It is governed by the principle ‘One Man One Vote’. So, irrespectivve of the amount of capital contributed, every member is entitled to equal voting right.

Limited Liability: The liability of the members of a cooperative society is limited to the extent of their capital contribution. Their personal assets need not be used for repaying the business debts.

Stable Existence: The

●

death

●

bankruptcy

●

or insanity

of any member does not affect the continuity of a cooperative society. The operations of the society are not affected by any change in the membership.

Economy in Operations: In general, the members offer honorary services to the society. The focus is to eliminate any middlemen. This helps in reducing the costs. The members constitute the customers or producers. So, the risk of bad debts is minimal.

Support from Government: The cooperative society exemplifies the idea of democracy. Due to this reason, it finds support from the Government in the form of

●

low taxes

●

subsidies

●

and low interest rates on loans.

Ease of Formation: The cooperative society can be started with a minimum of ten members. The registration procedure is simple and requires few legal formalities. Its formation is governed by the provisions of Cooperative Societies Act 1912

Limitations of Cooperative Socieities: The following are the limitations of cooperative societies.

Limited Resources: The resources of a cooperative society consists of capital contibutions of the members with limited means. The dividend rate on investment is low. This discourages people from becoming members and invest more capital.

Inefficiency in Management: As cooperative society has limited resources, it can not pay high salaries. Due to this reason, it can not attract and employ expert managers. The cooperative society gets the service of members who offer honorary services on a voluntary basis. These members are not experts in handling management functions effectively.

Lack of Secrecy: As per the Societies Act (7), the information should be open. So, the members hold open discussions in the meetings. So, it is difficult to maintain secrecy about the operations of a cooperative society.

Government Control: As the Government provides some previleges to the cooperative societies, the cooperative societies have to comply with several rules and regulations related to auditing of accounts, submission of accounts etc. The State Cooperative departments try to contol the functioning of a cooperative society. This causes interference in the functioning of cooperative societies. This in turn, negatively affect the freedom of operation of the society.

Differences of Opinion: Due to difference of opinion, internal disputes are common. This causes difficulty in decision making. When few members start giving preference to personal interests, the welfare motive is negatively impacted. So, there will be personal gain of few members and the benefit of other members takes a backseat.

5. Distinguish between a Joint Hindu family business and partnership.

A Joint Hundu Family business and partnership are distinguished in the table below.

Basis

Joint Hundu Family

Partnership

1. Formation

It is governed by the Hindu Law/ Hundu Succession Act, 1956. It does not require any agreement.

It is formed by an agreement between two or more persons who have agreed to share the profits of a business.

2. Membership

Only Members of a family, by birth, become partners in the business.

Any person, can be a member if he/she agrees to share the profits of the business and is legally competent to contract.

3. Liability

The liability of Karta is unlimited, while for other members it is limited to their share in the joint property of the family.

The liability of all partners is unlimited. They are jointly and individually liable for the debts of the firm.

4. Management

Only the eldest member i.e., the Karta, has the right to manage the affairs of the business.

All partners have a right to partcipate in the management of firm, unless agreed otherwise.

5. Continuity

The death, insanity, or bankruptcy of any member does not affect the continuity of the business.

The death, insanity, or bankruptcy of a partner may lead to dissolution of the firm, unless the partners have agreed otherwise.

6. Minor Members

Minors can be members of the business.

Minors can not become partners in a firm, although they can be admitted to the benefits (and not losses) of the partnership, with the consent of all partners.

7. Agency

Only Karta is the implied agent of the other parners. The act of other members do not bind the business.

Every partner is a principal as well as agent for the other partners. So, any partner’s act binds the firm.

8. Profit Sharing

The profits are shared as per the agreed proportions among the members

The profits must be shared equally among all partners, unless there is an agreement stating different proportions.

6. Despite limitations of size and resources, many people continue to prefer sole proprietorship over other forms of organisation? Why?

Despite limitations of size and resources, many people continue to prefer sole proprietorship over other forms of organisations due to the following reasons:

(i)

(ii)

(iii)

Direct Incentive: The sole proprietors reaps all the benefits of the business as they are the sole recipients of all the profits. As they’re the single owners, they don’t have to share the profits with others. This provides them maximum incentive/motivation to work hard.

(iv)

●

self-satisfaction

●

a sense of accomplishment

●

and confidence in their abilities.

(v)

(vi)

Personal Touch: Since the owner is closely connnected to all functions of the business, they can provide a personal touch to the services. This can foster a closer relationship with the owners, thus driving customer loyalty.

Application Questions

1. In which form of organisation is a trade agreement made by one owner binding on the others? Give reasons to support your answer.

In a Partnership firm, a trade agreement made by one owner is binding on the others. The reasons for this are:

Mutual Agency: One of the essential features of a partnership is mutual agency, which means every partner is both principal and agent for other partners. This means that any action taken or any agreement made by one partner on behalf of the firm is binding on all other partners.

ii.

Joint Liability: All partners have joint liability for the obligations of the firm. Therefore, if one partner enters into a contract or agreement on behalf of the firm, all partners are jointly liable to fulfil that agreement.

iii.

Implied Authority: Every partner, acting within the scope of their apparent authority, can bind the firm and the other partners for any act done to carry on the business. This is also known as the doctrine of implied authority.

2. The business assets of an organisation amount to ₹ 50,000 but the debts that remain unpaid are ₹ 80,000. What course of action can the creditors take if

(a)

The organisation is a sole proprietorship firm

(b)

The organisation is a partnership firm with Anthony and Akbar as partners. Which of the two partners can the creditors approach for repayment of debt? Explain giving reasons

(a) If the organisation is a Sole Proprietorship firm:

●

In a sole proprietorship, the owner has unlimited liability. This means that the owner is personally responsible for all the debts of the business.

●

In this case, since the assets of the firm are insufficient to cover the debts, the creditors can go after the personal assets of the sole proprietor to recover the remaining amount of ₹ 30,000 (₹ 80,000 – ₹ 50,000).

(b) If the organisation is a Partnership firm with Anthony and Akbar as partners:

●

In a partnership firm, the partners have joint and several liability. This means that each partner can be held responsible for the full amount of the debt.

●

In this situation, the creditors can approach either Anthony or Akbar, or both, to recover the outstanding debt.

●

The choice of whom to approach can depend on several factors such as the personal assets of the partners, their role in the firm, and any agreements within the partnership about responsibility for debts.

●

If one partner pays more than their share of the debt, they may have a claim against the other partner for that excess.

3. Kiran is a sole proprietor. Over the past decade, her business has grown from operating a neighbourhood corner shop selling accessories such as artificial jewellery, bags, hair clips and nail art to a retail chain with three branches in the city. Although she looks after the varied functions in all the branches, she is wondering whether she should form a company to better manage the business. She also has plans to open branches countrywide.

(a)

Explain two benefits of remaining a sole proprietor

(b)

Explain two benefits of converting to a joint stock company

(c)

What role will her decision to go nationwide play in her choice of form of the organisation?

(d)

What legal formalities will she have to undergo to operate business as a company?

a) Two benefits of remaining a Sole Proprietor:

Complete Control: As a sole proprietor, Kiran has complete control over all aspects of her business. She can make decisions quickly without needing approval from any partners or board members.

Confidentiality: The financial matters and profits of a sole proprietorship are known only to the owner. Kiran can keep her business secrets to herself, which might give her a competitive advantage.

(b) Two benefits of converting to a Joint Stock Company:

More Capital: A joint stock company can raise more funds by issuing shares to the public. This would be beneficial for Kiran, especially if she wants to expand her business nationwide.

Limited Liability: The liability of shareholders in a joint stock company is limited to the amount of their investment. This means that Kiran’s personal assets would be protected if the company incurs any debts.

Scale of Operations: As Kiran is planning to go nationwide, the scale of her operations will significantly increase. Managing multiple outlets across the country would require a more structured form of organization like a joint-stock company to ensure efficient operations.

ii.

Raising Capital: The expansion plan would also require a considerable amount of funding. A sole proprietorship may face limitations in this regard. A joint-stock company, on the other hand, can raise large capital as it has the ability to issue shares to the public.

iii.

Risk Distribution: Going nationwide would involve high risks due to fluctuations in different markets across the country. In a joint-stock company, these risks would be shared among a large number of shareholders, reducing the burden on a single individual.

(d) Legal formalities to operate business as a Company:

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Kiran will need to register her company with the Registrar of Companies (ROC) and comply with the Companies Act.

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She will need to prepare necessary documents such as the Memorandum of Association and Articles of Association.

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Kiran will need to obtain a Certificate of Incorporation from the ROC. This is like a birth certificate for the company and confirms that a company exists.

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If Kiran decides to go public, she will need to issue a prospectus, which is a detailed statement that describes the company and invites the public to buy its shares.