Forms of Business Organization Class 11 Notes

This chapter introduces the various forms of business organizations that a person can choose from while starting a business.

These forms include Sole Proprietorship, Joint Hindu Family Business, Partnership, Cooperative Society, and Joint Stock Company. Each form has its own advantages and disadvantages.

1) Sole Proprietorship

A sole proprietorship is the simplest form of business where one person owns and manages the business.

a) Features of Sole Proprietorship

• Single Ownership: Only one person owns the business.
• Unlimited Liability: The owner is personally liable for all business debts.
• No Separate Legal Entity: The business and the owner are considered the same in the eyes of the law.
• Simple Formation: Easy to start with fewer legal formalities.
• Complete Control: The owner has full control over the decision-making and operations of the business.
• Profit Sharing: The owner gets all the profits generated by the business.

b) Merits of Sole Proprietorship

• Full Control: The owner has complete control over the business and its operations.
• Direct Profits: All profits belong to the owner.
• Easy to Start and Close: The business can be started and closed without much paperwork or formalities.
• Flexibility: The owner can make quick decisions and change strategies easily.
• Personalized Service: The business can focus on providing personal services to customers.

c) Demerits of Sole Proprietorship

• Unlimited Liability: The owner is personally liable for business debts, which may lead to financial risk.
• Limited Capital: The business can only raise a limited amount of capital, restricting growth.
• Limited Expertise: The owner may lack expertise in all business areas (e.g., marketing, finance).
• Limited Continuity: The business may shut down if the owner dies or becomes ill.
• High Risk: The entire risk of the business rests with the owner.

2) Joint Hindu Family Business

A Joint Hindu Family Business is a business owned by members of a Hindu family, and it is governed by Hindu law.

a) Features of Joint Hindu Family Business

• Family-Owned: The business is run by the family under the control of the “Karta” (head of the family).
• Karta’s Authority: The Karta manages the business and makes decisions on behalf of the family.
• Limited Liability: Liability of all members, except the Karta, is limited to their share in the family property.
• Shared Profits: The profits are shared by the family members based on their share in the family business.
• Perpetual Succession: The business continues even if the Karta changes, as the successor will take over.

b) Merits of Joint Hindu Family Business

• Easy to Set Up: The business is easy to start with no complex legal formalities.
• Limited Liability for Members: Except for the Karta, members’ liability is limited to their share in the family assets.
• Continuity: The business continues even if the Karta changes.
• Family Support: All family members contribute to the success of the business.

c) Demerits of Joint Hindu Family Business

• Limited Resources: The business is limited by the assets and resources of the family.
• Conflict Among Family Members: Family disputes can affect business decisions and operations.
• Karta’s Full Control: The Karta has full control, and other members may not have a say in decision-making.
• Limited Scope for Expansion: The business may not grow beyond the resources of the family.

3) Partnership

A partnership is a business formed by two or more persons who agree to share the profits and losses of the business.

a) Features of Partnership

• Two or More Partners: A partnership must have at least two members. The maximum number of partners could be 50 as per The Companies (Miscellaneous) Rules, 2014. As per The Companies Act, 2013, the maximum number of partners could be 100.
• Agreement: The relationship between partners is based on an agreement (Partnership Deed).
• Shared Liability: All partners share the liabilities and responsibilities of the business.
• Shared Profits: Profits are shared among partners as per the agreed ratio.
• No Separate Legal Entity: The partnership does not have a separate legal identity from its partners.

b) Merits of Partnership

• More Capital: Partnerships can pool together more capital than sole proprietorships.
• Shared Responsibility: Partners share the management and work, which reduces the burden on one person.
• Flexibility in Decision-Making: Decisions can be made jointly, and changes can be made easily.
• Better Skills and Expertise: Partners bring in their diverse skills and knowledge.

c) Demerits of Partnership

• Unlimited Liability: Partners are personally liable for business debts.
• Disagreements Among Partners: Differences in opinions and conflicts between partners can disrupt business.
• Lack of Continuity: If a partner dies or withdraws, the partnership may dissolve.
• Profit Sharing: Profits must be shared among partners, which may not be desirable for some.

d) Types of Partners

• Active Partner: A partner who takes an active role in the day-to-day management of the business.
• Sleeping Partner: A partner who invests capital but does not participate in the business management.
• Secret Partner: A partner whose involvement is not publicly known.
• Nominal Partner: A partner who lends their name to the business but does not contribute capital or manage the business.
• Partner by Estoppel: A person who, by their actions or words, leads others to believe they are a partner, even if they are not.
• Partner by Holding Out: A person who is not a partner but represents themselves as one to third parties.

e) Types of Partnership

• General Partnership: All partners share equal responsibility and liability.
• Limited Partnership: Some partners have limited liability and do not take part in day-to-day operations.

f) Partnership Deed

A Partnership Deed is a written agreement that outlines:

• The name of the partnership firm.
• The duties and responsibilities of each partner.
• The capital contributed by each partner.
• The profit-sharing ratio.
• The duration of the partnership.
• Rules for managing and resolving disputes.

4) Cooperative Society

A Cooperative Society is a voluntary association of people who come together to meet common economic, social, or cultural needs.

a) Features of Cooperative Society

• Voluntary Membership: Membership is open to anyone who shares a common interest.
• Democratic Management: Each member has one vote, irrespective of their shareholding.
• Limited Liability: Members are only liable for the amount of capital they have invested.
• Profit Sharing: Profits are distributed based on the member’s contribution, not based on the capital invested.
• Focus on Service: The primary objective is to serve the needs of the members, not just profit generation.

b) Merits of Cooperative Society

• Equal Rights for All Members: Each member has an equal say in decision-making.
• Social Welfare: Co-operatives aim to improve the welfare of their members.
• Limited Liability: Members are only liable up to the amount of their shares.
• Economical and Low-Cost Services: Co-operatives often provide goods and services at a lower cost.
• Support for the Weaker Sections: Co-operatives often support economically weaker sections of society.

c) Demerits of Cooperative Society

• Slow Decision-Making: The democratic process can result in delays in decision-making.
• Limited Capital: Raising funds is difficult as the capital is contributed by the members.
• Lack of Motivation: Members may lack the motivation to work hard for the benefit of the society.
• Inefficiency: Due to the lack of a profit motive, some co-operatives may become inefficient.

d) Types of Cooperative Society

• Consumer Cooperative Society: Provides goods at lower prices to its members.
• Producer Cooperative Society: Helps producers in pooling resources for production and marketing.
• Marketing Cooperative Society: Helps members sell their products collectively.
• Farmer Cooperative Society: Helps farmers purchase seeds, fertilizers, and equipment at lower rates.
• Credit Cooperative Society: Provides financial services like loans to its members.

Public, Private, and Global Enterprises Class 11 Notes

5) Joint Stock Company

A Joint Stock Company is a business organization where ownership is divided into shares, and the liability of shareholders is limited.

a) Features of Joint Stock Company

• Separate Legal Entity: The company is a separate legal entity from its owners (shareholders).
• Limited Liability: Shareholders’ liability is limited to the amount they invest in the shares.
• Transferability of Shares: Shares can be freely transferred to others.
• Perpetual Existence: The company continues even if the shareholders change.
• Professional Management: The company can hire professional managers for its operations.

b) Merits of Joint Stock Company

• Limited Liability: Shareholders are not personally liable for company debts.
• Raising Capital: A company can raise large amounts of capital by issuing shares to the public.
• Perpetual Succession: The company continues even if shareholders change.
• Better Management: The company can hire professional managers.

c) Demerits of Joint Stock Company

• Complex Formation: It involves legal formalities and is more expensive to set up.
• Government Regulation: Companies are subject to strict government rules and regulations.
• Loss of Control: Shareholders may not be involved in the day-to-day operations.
• Profit Sharing: Profits are shared among a large number of shareholders.

d) Types of Companies

6) Choice of Form of Business Organization

When choosing a form of business, entrepreneurs must consider various factors:

a) Cost and Ease in Setting Up

• Sole proprietorships are the easiest and cheapest to set up, while companies require more paperwork and legal formalities.

b) Liability

• Sole proprietorships and partnerships have unlimited liability, whereas companies have limited liability.

c) Continuity

• Companies have perpetual existence, while sole proprietorships and partnerships may end with the death or withdrawal of the owner or partner.

d) Management Ability

• Sole proprietorships and partnerships allow owners to manage directly, while companies need professional management.

e) Capital Consideration

• Companies can raise large amounts of capital by issuing shares, while sole proprietorships and partnerships have limited capital.

f) Degree of Control

• Sole proprietors have full control, while partners and shareholders have limited control over partnerships and companies.

g) Nature of Business

• The choice depends on the size and nature of the business. Small businesses may opt for sole proprietorship or partnership, while large businesses often go for companies.

This concludes the notes on the Forms of Business Organization for Class 11 students. These forms offer different advantages and disadvantages, so the right choice depends on the nature and size of the business.