Chapter 2 Forms of Business Organisation NCERT SOLUTION CLASS 11TH Business Studies| EDUGROWN NOTES

Short Answer Type Question:

Q.1 For which of the following types of business do you think a sole proprietorship form of organisation would be more suitable and why?

1. Grocery store
2. Medical store
3. Legal consultancy
4. Craft centre
5. Internet cafe
6. Chartered accountancy firm

ANSWER: Sole proprietorship is a form of business wherein only a single person is the owner of the business. He is the only one who manages and controls the business. Thus, among the given alternatives, this form of business would be more suitable for a grocery store, medical store, craft centre and internet cafe. The reason for this is that these types of businesses would require less initial capital, limited managerial ability and minimal legal formalities. Apart from these, direct personal contact with consumers is required in all the mentioned businesses which is possible only under a sole proprietorship form of business.  

Q.2 Explain the following terms in brief:

1. Perpetual succession
2. Common seal
3. Karta
4. Artificial person

ANSWER:

1. Perpetual succession: This is one of the features of a Joint Stock Company. It means that a company has a separate legal entity and is not influenced by the death, insolvency or retirement of its members. A company is created by law; thus, it can only be ended by law. The company ceases to exist only when the procedure of its closing called ‘winding up’ is completed.
2. Common seal: It is an official signature of the company. Because a company is an artificial entity, it acts through its Board of Directors and other officials. The document through which the company gets into an agreement needs to have a common seal; otherwise, it would not be legally binding on the company.
3. Karta: Karta, apart from being the senior-most member of the family, is also the head of the Hindu Undivided Family. He has the absolute decision-making authority over the business which gives him unlimited liability. It is only the karta who has the right to enter into a legal contract with others.
4. Artificial person: This term is used to refer to the company. This is because though it has its legal identity-rights, liabilities and functions, it is not a human being.  Also, it is a person existing in the eyes of the law but is dependent on the Board of Directors and other members to get its work done.

1. Perpetual succession: This is one of the features of a Joint Stock Company. It means that a company has a separate legal entity and is not influenced by the death, insolvency or retirement of its members. A company is created by law; thus, it can only be ended by law. The company ceases to exist only when the procedure of its closing called ‘winding up’ is completed.
2. Common seal: It is an official signature of the company. Because a company is an artificial entity, it acts through its Board of Directors and other officials. The document through which the company gets into an agreement needs to have a common seal; otherwise, it would not be legally binding on the company.
3. Karta: Karta, apart from being the senior-most member of the family, is also the head of the Hindu Undivided Family. He has the absolute decision-making authority over the business which gives him unlimited liability. It is only the karta who has the right to enter into a legal contract with others.
4. Artificial person: This term is used to refer to the company. This is because though it has its legal identity-rights, liabilities and functions, it is not a human being.  Also, it is a person existing in the eyes of the law but is dependent on the Board of Directors and other members to get its work done.

Q.3 Compare the status of a minor in a joint Hindu family business with that in a partnership firm.

ANSWER:

Minor	Joint Hindu Family	Partnership Firm
Can become a member right after his birth	Cannot be a partner in a partnership firm
Enjoys equal ownership over the inherited property just like the rest of the other members of the family	Can be admitted to the benefits of the partnership firm with the consent of all the other partners

Q.4 If registration is optional, why do partnership firms willingly go through the legal formality of getting themselves registered? Explain.

ANSWER:

Registration for a partnership firm is not necessary. However, firms still voluntarily apply for registration. This is because it is a definite proof of the firm’s existence, and if a firm does not get itself registered, then it can lose out on many benefits. In addition, some serious consequences it can face because of non-registration are

• Inability to file a suit by the partner of an unregistered firm against another firm.
• Inability to file a suit against a third party for the recovery of claims. However, suits can be filed against a non-registered firm by a registered firm for their claims.
• Inability to file a suit against any of its co-partners.

Q.5 State the important privileges available to a private company.

ANSWER: Important privileges available to a private company over a public company:

• Number of members required: The number of members required for the formation of a private company is two, while it is seven for a public company.

• Number of directors required: A private firm requires at least two directors, but a public company needs a minimum of three directors.

• Commencement of business: Business can be started by a private company as soon as it receives its certificate of incorporation. A public company, on the other hand, needs a certificate of commencement for starting the business.

• Index of members: There is no compulsion to maintain the index of members for the private company. On the contrary, it is mandatory to maintain an index of members for a public company.

• Issuance of loans to directors: For a private company, loans can be issued to the directors without prior permission of the government. On the other hand, for a public company, loans can be issued to the directors only after taking the permission of the government.https://6ca32cef050f567274fa29b397f1d939.safeframe.googlesyndication.com/safeframe/1-0-38/html/container.htmlQuestion SA 4

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

A cooperative society is a voluntary association of persons who have come together and work together for the welfare of its members. This society conducts its election in a democratic manner, i.e. it follows the principle of ‘one man, one vote’. Every member of the society is entitled to one vote irrespective of the capital invested by him/her or the number of shares he/she has. This prevents any kind of discrimination in the body. Also, members have the right to join or leave the society anytime without any compulsion.

Moreover, the membership of the society is open to all without any kind of discrimination on the basis of religion, caste or sex. This signifies the secular nature of a cooperative society.Question SA 5

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

A person who by his initiative, words, conduct or behaviour gives others an impression that he is a partner of the firm is known as ‘partner by estoppel’. Such partners do not contribute any capital and do not participate in management activities. They are also not entitled to any kind of profits or losses incurred by the company. However, they can be held liable to any loans, debts or credits by the third party as they are considered partners by them. In these kinds of cases, assets of such partners can be used to clear debts.

Long Answer Type question:

Q.1 What do you understand by a sole proprietorship firm? Explain its merits and limitations.
Answer: If entrepreneur starts sole proprietor form of business, then he has the following advantages.
Advantages of Sole Proprietor Form of Business:
1. Easy formation: The formation of sole proprietorship business is very easy and simple. No legal formalities are involved for setting up the business except a license or permission in certain cases. The entrepreneur with initiative and certain amount of capital can set up such form of business.
2. Direct motivation: The entrepreneur owns all and risks all. The entire profit goes to his pocket. This motivates the proprietor to put his heart and soul in the business to earn more profit. Thus, the direct relationship between effort and reward motivates the entrepreneur to manage the business more efficiently and effectively.
3. Better control: The entrepreneur takes all decisions affecting the business. He chalks out the plan and executes the same. His eyes are on everything and everyone. There is no scope for laxity. This results in better control of the business and ultimately leads to efficiency.
4. Promptness in decision-making: When the decision is to be taken by one person, it is sure to be quick. Thus, the entrepreneur as sole proprietor can arrive at quick decisions concerning the business by which he can take the advantage of any better opportunities.
5. Secrecy: Each and every aspect of the business is looked after by the proprietor and the business secrets are known to him only. He has no legal obligation to publish his accounts. Thus, the maintenance of adequate secrecy leaves no scope to his competitors to be aware of the business secrets.
6. Flexibility in operations: The sole proprietorship business is undertaken on a small scale. If any change is required in business operations, it is easy and quick to bring the changes.
7. Scope for personal touch: There is scope for personal relationship with the entrepreneur and customers in sole proprietorship business. Since the scale of operations is small and the employees work under his direct supervision, the proprietor maintains a harmonious relationship with the employees. Similarly, the proprietor can know the tastes, likes and dislikes of the customers because of his personal rapport with the customers.
8. Free from Government control: Sole proprietorship is the least regulated form of business. Regulated laws are almost negligible in its formation, day-to-day operation and dissolution.
Disadvantages of Sole Proprietor Form of Business:
The sole proprietorship business is not free from criticism. It suffers from certain limitations and drawbacks, because of its very nature and scope of operations. These points may be duly taken care of while entrepreneur adopting this mode of business.
1. Limited resources: The financial resources of any small business as an individual is limited. He mainly finances from his own savings or borrows from financial institutions, friends and relatives as per his capacity. Thus, limited resource is the major drawback of this form of business.
2. Limited managerial capability: Modern business requires updated managerial skills in each and every sphere of activity. We cannot hope a single individual to possess all the managerial, talents necessary to carry on a business efficiently. The limited financial resources of the sole proprietorship is a hindrance to hire the services of managers with expertise in different areas, thereby the growth of the business.
3. Unlimited liability: Since the liability of the sole proprietor is unlimited, the private properties of the proprietor is also at risk. When the business fails, the private properties of the owner are utilized to pay off the business debts. Thus, the proprietor must have to look this aspect carefully.
4. Uncertainty of continuity: The continuity of the business is uncertain because the business may come to an end due to the incapacity or death of the proprietor. Even if at all the business passes on to the successor of the proprietor, it is unlikely that they may pose the business acumen like that of the proprietor. The discontinuance of the business is a social loss.
5. Not suitable for large-scale business: The limited financial resources, limited managerial capability of the proprietor, risk to the private property etc. makes the proprietorship business unsuitable for large-scale business. This system of business cannot afford for large-scale operation.
6. Difficult to maintain personal contact: Even though there is scope for personal touch in sole proprietorship business, it is unlikely to happen when the business is undertaken in different areas. It is not so easy on the part of the proprietor to have personal contact with customers and suppliers at the same time.

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

1. Uncertainty of duration: A partnership suffers from a possible limited span of life. Legally, a partnership firm must be dissolved on the retirement, death, bankruptcy, or lunacy of any partner or demanded by any partner. The probability of any one of these events occurring when the number of partners is much greater than in the case of a sole proprietor.
2. Risks of additional liability: It is true that like the sole proprietor, each partner has unlimited liability. But his liability may arise not only from his own acts but also from the acts and mistakes of co-partners over whom he has no control.
3. Lack of harmony: The old saying that “too many cooks spoil the broth” can be apt for a business partnership. Harmony may be difficult to achieve, especially when there are many partners. Lack of centralized authority and conflicts in policy can disrupt the organization.
4. Difficulty in withdrawing investment: Investment in a partnership can be simple, but its withdrawal may be difficult or costly when this aspect is considered from the point of view of individual partners. This is so because no partner can withdraw his interest from the firm without the consent of all partners.
5.  Lack of public confidence: A partnership may suffer from lack of public confidence
6. Lack of public confidence: A partnership may suffer from lack of public confidence because, like that of a company there is no legal mechanism to enforce the registration of a partnership firm and the disclosure of its affairs.
7. Limited resources: A partnership is good as it can be started with limited capital. However, it becomes a handicap in the growth and expansion phases of the business. There is a limit beyond which it is almost impossible for partners to collect capital. This limit is generally up to the personal properties of the partners.
8. Unlimited liability: Unlimited liability discourages partners to undertake risky ventures, and therefore, their risk-taking initiative is very risky.

Merits of Partnership

• It is easy to set up.
• It has more capital, which can be brought into the business.
• Partners brings new skills and ideas to a business.
• Decision-making can be much easier with more brains to think about a problem.
•  Partners share responsibilities and duties of the business.
•  Division of labour is possible as partners may have different skills.

Limitations of Partnership

• There is an unlimited liability: All the partners are responsible for the debts of the firm and if the business goes bankrupt, all the partners will have to clear the debts even if they have to sell off their personal belongings.
• Disagreement among the partners can lead to problems for the business.
• There is a limit to the capital invested. Because of the fact that maximum 20 members are allowed, the business may find it difficult to expand after a certain limit.
• There is no continuity of existence. Partnership is dissolved if one of the partners die or resigns or becomes bankrupt.

Q.3 Discuss the characteristics, merits and limitations of the cooperative form of organization. Also describe briefly different types of cooperative societies.
Answer: It is important to choose an appropriate form of organization as it will determine:
1. Extent of control;
2. Extent of liability;
3. Availability of resources;
4. Legal formalities.
All these in turn will determine profits of the business.
Different types of cooperative societies are explained below:

1. Producer’s cooperative societies: The producer’s cooperatives are established by the small producers. The members of the society produce goods in their houses or at common place. The raw materials, tools, money, etc. are provided to them by the society. The output is collected by the society and sold in the market at the wholesale rate. The profit is distributed among the members in proportion to the goods supplied by each member.
2. Consumer’s cooperative societies: Consumer’s cooperative societies are established to remove middlemen from the field of trade. These societies purchase foods at the wholesale prices and sell these goods to the members at cheaper rates than the market prices. However, the goods are sold to the non-members at the market rates. The profit, if any, is distributed among the members in the shape of bonus according to their purchase ratio.
3. Marketing cooperative societies: The marketing cooperative societies are formed by the small producers for the promotion of trade. The two main objectives of these societies are, to sell the good at reasonable prices by eliminating middlemen and to make there ready for the product of the member. These types of societies are formed by the small agriculturalist and artisans. These societies collect the products of its members and make its grading and keep them in warehouses and sell them in the market at whole sale rate when the market is ready for these products. The profit is distributed among the members according to the ratio of goods supplied by them.
4. Credit cooperative societies: These cooperative societies are formed for the financial help of the members. These societies provide loans to the members at low rate of interest. In rural areas these provide loans to the farmers for the purchase of seeds, fertilizers and cattle. In urban areas these societies provide loan to its members for the purchase of raw materials and tools.
5.  Farming cooperative societies: These societies are formed by the small agriculturalist to get the benefits of large scale farming. These societies provide help to the farmer for the improve method of cultivations by providing large scale farming tools such as tractors, threshers and harvesters, etc.
6. Housing cooperative societies: These societies are formed for the procurement of land for the construction of houses on a homogeneous basis. These societies are formed by those members who are intended to construct their own home. These societies provide loan to the members for the construction of houses. These also purchase construction materials in bulk and provide this material to its member at cheaper rates.

Q.4 Distinguish between a Joint Hindu family business and partnership.
Answer: Differences between Joint Hindu family systems and sole proprietorship are given below:

1. Regulating law: A partnership is governed by the provisions of the Indian Partnership Act, 1932. A Joint Hindu family business is governed by the principles of Hindu law.
2. Mode of creation: A partnership arises out of a contract, whereas a Joint Hindu family business arises by the operation of law and is not the result of a contract.
3. Admission of new members: In a partnership no new partner is admitted without the consent of all the partners, while in the case of a Joint Hindu family firm, a new member is admitted just by birth.
4. The position of families: In a partnership women can be full-fledged partners, while in a Joint Hindu family business membership is restricted to male members only. After the passage of the Hindu Succession Act, 1956, families get only co-sharer’s interest at the death of a coparcener and they do not become coparceners themselves.
5. Number of members: In partnership the maximum limit of partners is 10 for banking business and 20 for any other business, but there is no such maximum limit of members in the case of Joint Hindu Family business.
6. Liability of members: In partnership, the liability of the partners is joint and several as well as unlimited. In other words, each partner is personally and jointly liable to an unlimited extent and if partnership liabilities cannot be fully discharged out of the partnership property each partner’s separate personal property is liable for the debts of the firm.

In a Joint Hindu family business, only the ‘Karta’ is personally liable to an unlimited extent, i.e., his self-acquired or other separate property besides his share in the joint family property is liable, for debts contracted on behalf of the family business.

Q.5 Despite limitations of size and resources, many people continue to prefer sole proprietorship over other forms of organization. Why?
Answer: Despite limitations of size and resources, many people continue to prefer sole proprietorship over other forms of organization because of following merits:

1. Easy to start and close: It can be easily started and closed without any legal formalities.
2. Quick decision making: As sole trader is not required to consult or inform anybody about his decisions.
3. Secrecy: He is not expected to share his business decisions and secrets with anybody.
4. Direct incentive: Direct relationship between efforts and reward provide incentive to the sole trader to work hard.
5.  Personal touch: The sole trader can maintain personal contacts with his customers and employees.
6. Social utility: It provides employment to persons with limited money who are not interested to work under others. It prevents concentration of wealth in a few hands.

Q.6 What do you mean by incorporation of a company? What are the steps involved in corporation of a company?
Answer: Incorporation of the company: It means registration of the company under Companies Act, 1956. The second stage involves the following steps:

1.  Filling of documents: An application to the registrar for incorporation must be accompanied with following documents:
   • Memorandum of Association;
   •  Articles of Association or statement in lieu of the prospectus (in case table A is adopted by public limited company);
   • Written consent of proposed directors;
   •  Agreement (if any) with proposed managing director, manager, etc.;
   •  Copy of registrar’s letter approving the company’s name;
   •  Statutory declaration;
   • Notice of the exact address of the registered office.
2. Payment of fees: Along with the above documents, necessary fees is to be paid.
3.  Certificate of incorporation: The registrar issues a certificate of incorporation after being satisfied. Certificate is a conclusive evidence of regularity of incorporation of a company irrespective of any deficiency in its registration.

Q.7 Explain different types of partners.
Answer: Different types of partners are given below:

1. General/Active Partner: Such a partner takes active part in the management of the firm.
2. Sleeping of Dormant Partner: Although he does not take active part in the management of the firm, he invests money, shares profit and loss, has unlimited liability.
3. Secret Partner: He participates in business secretly without disclosing his association with the firm to general public. His liability is also unlimited.
4.  Nominal Partner: Such a partner only gives his name and goodwill to the firm. He neither invests money nor takes profit. But his liability is unlimited.
5. Partner by Estoppels: He is the one who by his words or conduct gives impression to the outside world that he is a partner of the firm whereas actually he is not. His liability is unlimited towards the third party who has entered into dealing with firm on the basis of his pretension.
6. Partner by Holding out: He is the one who is falsely declared partner of the firm whereas actually he is not. And even after becoming aware of it, he does not deny it. His liability is unlimited towards the party who has dealt it with firm on the basis of this declaration.

Q.8 Explain meaning, features, merits and demerits of Sole Proprietorship.
Answer: Sole Proprietorship means a business owned, financed and controlled by a single person who is recipient of all profits and bearer of all risks. It is suitable in areas of
personalized services like beauty parlour, hair cutting saloons and small scale activities like retail shops.
Features:

• Single Ownership: It is wholly owned by one individual.
• Control: Sole proprietor has full power of decision making.
• No Separate legal entity: Business and businessman are not separate entities in the eyes of law.
• Unlimited liability: The liability of owner is unlimited. In case the assets of business are not sufficient to meet its debts, the personal property of owner can be used for paying debts.
• No legal formalities: No legal formalities are required to start, manage and dissolve such business organization.
• Sole risk bearer and profit recipient: He bears the complete risk and there is nobody to share profit / loss with him.

Merits:

• Easy to start and close: It can be easily started and closed without any legal formalities.
• Quick decision making: As sole owner is not required to consult or inform anybody about his decisions.
• Secrecy: He is not expected to share his business decisions and secrets with anybody.
•  Direct incentive: Direct relationship between efforts and reward provide incentive to the sole trader to work hard.
• Personal touch: The sole trader can maintain personal contacts with his customers and employees.
• Social utility: It provides employment to persons with limited money who are not interested to work under others. It prevents concentration of wealth in a few hands.

Limitations:

• Limited financial resources: Funds are limited to the owner’s personal savings and his borrowing capacity.
• Limited managerial ability: Sole trader can’t be good in all aspects of business and he can’t afford to employ experts also.
• Unlimited liability: Unlimited liability of sole trader compels him to avoid risky and bold business decisions.
• Uncertain life: Death, insolvency, lunacy or illness of a proprietor affects the business and can lead to its closure.
• Limited scope for expansion: Due to limited capital and managerial skills, it cannot expand to a large scale.

Q.9 Explain meaning, features, merits and demerits of partnership firm.
Answer: Partnership is a voluntary association of two or more persons who agree to carry on some business jointly and share its profits and losses. The partnership was evolved to overcome the shortcomings of sole proprietorship and Joint Hindu Family business.
Features:

• Two or more persons: There must be at least two persons to form a partnership. The maximum number of persons is 10 in banking business and 20 in non-banking business.
• Agreement: It is an outcome of an agreement among partners which may be oral or in writing.
• Lawful business: It can be formed only for the purpose of carrying on some lawful business.
• Decision making and control: Every partner has a right to participate in management and decision making of the organization.
• Unlimited liability: Partners have unlimited liability.
•  Mutual agency: Every partner is an implied agent of the other partners and of the firm. Every partner is liable for acts performed by other partners on behalf of the firm.
• Lack of continuity: Firms existence is affected by the death, lunacy and insolvency of any of its partner. It suffers from lack of continuity.

Merits:

• Ease of formation and closure: It can be easily formed. Only an agreement among the partners is required.
• Larger financial resources: There are more funds as capital is contributed by number of partners.
• Balanced decisions: As decisions are taken jointly by partners after consulting each other.
• Sharing of risks: In it, risk gets distributed among partners which reduces anxiety, burden and stress on individual partner.
• Secrecy: Secrecy can be easily maintained about business affairs as they are not required to publish their accounts or to file any report to the government.

Limitations:

• Limited resources: There is a restriction on the number of partners and hence capital contributed by them is also limited.
• Unlimited liability: The liability of partners is unlimited and they are liable individually as well as jointly. It may prove to be a big drawback for those partners who have greater personal wealth. They will have to repay the entire debt in case the other partners are unable to do so.
• Lack of continuity: Partnership comes to an end with the death, retirement, insolvency or lunacy of any of its partners.
• Lack of public confidence: Partnership firms are not required to publish their reports and accounts. Thus they lack public confidence.

Q.10 Explain meaning, features, merits and demerits of joint stock company.
Answer: Joint stock company is a voluntary association of persons having a separate legal existence, perpetual succession and common seal. Its capital is divided into transferable shares.
Features:

• Separate legal existence: It is created by law and it is a distinct legal entity independent of its members. It can own property, enter into contracts, can file suits in its own name.
• Perpetual existence: Death, insolvency and insanity or change of members has no effect on the life of a company. It can come to an end only through the prescribed legal procedure.
• Limited Liability: The liability of every member is limited to the nominal value of the shares bought by him or to the amount, guaranteed by him.
• Transferability of shares: Shares of public company are easily transferable. But there are certain restrictions on transfer of share of private company.
•  Common seal: It is the official signature of the company and it is affixed on all important documents of company.
• Separation of ownership and control: Management of company is in the hands of elected representatives of shareholders known individually as director and collectively as board of directors.

Merits:

• Limited liability: Limited liability of shareholders reduces the degree of risk borne by him.
• Transfer of Interest: Easy transferability of shares increases the attractiveness of shares for investment.
• Perpetual existence: Existence of a company is not affected by the death, insanity, insolvency of member or change of membership. Company can be liquidated only as per the provisions of companies Act.
• Scope for expansion: A company can collect huge amount of capital from unlimited number of members who are ready to invest because of limited liability, easy transferability and chances of high return.
• Professional management: A company can afford to employ highly qualified experts in different areas of business management.

Limitations:

• Legal formalities: The procedure of formation of company is very long, time consuming, expensive and requires lot of legal formalities to be fulfilled.
• Lack of secrecy: It is very difficult to maintain secrecy in case of public company, as company is required to publish and file its annual accounts and reports.
• Lack of motivation: Divorce between ownership and control and absence of a direct link between efforts and reward lead to lack of personal interest and incentive.
• Delay in decision making: Red tapism and bureaucracy do not permit quick decisions and prompt actions. There is little scope for personal initiative.
• Oligarchic management: Company is said to be democratically managed but actually managed by a few people i.e., Board of Directors. Sometimes they take decisions keeping in mind their personal interests and benefit, ignoring the interests of Shareholders and company.

Q.11 Explain the meaning, features, merits and demerits of cooperative society.
Answer: A cooperative society is a voluntary association of persons of moderate means, who unite together to protect and promote their common economic interests.
Features:

• Voluntary association: Everyone having a common interest is free to join a cooperative society and can also leave the society after giving proper notice.
• Legal status: Its registration is compulsory and it gives it a separate identity.
• Limited liability: The liability of the member is limited to the extent of their capital contribution in the society.
• Democratic control: Management and control lies with the managing committee elected by the members by giving vote. Every member has one vote irrespective of the number of shares held by him.
• Service motive: The main aim is to serve its members and not to maximize the profit.
• State control: They have to abide by the rules and regulations framed by government for them.
• Distribution of surplus: The profit is distributed on the basis of volume of business transacted by a member and not on the basis of capital contribution of members.

Merits:

• Ease of formation: It can be started with minimum of 10 members. Registration is also easy as it requires very few legal formalities.
• Limited liability: The liability of members is limited to the extent of their capital contribution.
• Stable existence: Due to registration it is a separate legal entity and is not affected by death, lunacy or insolvency of any of its members.
• Economy in operations: There is economy in operation due to elimination of middle man and voluntary services provided by its members.
• Government support: Government provides support by giving loans at lower interest rates, subsidies and by charging less taxes.
• Social utility: It promotes personal liberty, social justice and mutual cooperation. They help to prevent concentration of economic power in a few hands.

Limitations:

• Shortage of capital: It suffers from shortage of capital as it is usually formed by people with limited means.
• Inefficient management: Cooperative society is managed by elected members who may not be competent and experienced. Moreover it can’t afford to employ expert and experienced people at high salaries.
• Lack of motivation: Members are not inclined to put their best efforts as there is no direct link between efforts and reward.
•  Lack of secrecy: Its affairs are openly discussed in its meeting which makes it difficult to maintain secrecy.
• Excessive government control: It suffers from excessive rules and regulations of the government. It has to get its accounts audited by the auditor and has to submit a copy of its accounts to registrar.
• Conflict among members: The members are from different sections of society with different view points. Sometimes when some members become rigid, the result is conflict.

Q.12 Explain different types of partners.
Answer: The different kinds of partners that are found in partnership firms are as follows:

1. Active or managing partner: A person who takes active interest in the conduct and management of the business of the firm is known as active or managing partner. He carries on business on behalf of the other partners. If he wants to retire, he has to give a public notice of his retirement; otherwise he will continue to be liable for the acts of the firm.
2. Sleeping or dormant partner: A sleeping partner is a partner who ‘sleeps’, that is, he does not take active part in the management of the business. Such a partner only contributes to the share capital of the firm, is bound by the activities of other partners, and shares the profits and losses of the business. A sleeping partner, unlike an active partner, is not required to give a public notice of his retirement. As such, he will not be liable to third parties for the acts done after his retirement.
3. Nominal or ostensible partner: A nominal partner is one who does not have any real interest in the business but lends his name to the firm, without any capital contributions, and doesn’t share the profits of the business. He also does not usually have a voice in the management of the business of the firm, but he is liable to outsiders as an actual partner.
4. Partner by estoppel or holding out: If a person, by his words or conduct, holds out to another that he is a partner, he will be stopped from denying that he is not a partner. The person who thus becomes liable to third parties to pay the debts of the firm is known as a holding out partner.
   There are two essential conditions for the principle of holding out : (a) The person to be held out must have made the representation, by words written or spoken or by conduct, that he was a partner ; and (b) The other party must prove that he had knowledge of the representation and acted on it, for instance, gave the credit.
5. Partner in profits only: When a partner agrees with the others that he would only share the profits of the firm and would not be liable for its losses, he will own as partner in profits only.
6. Minor as a partner: A partnership is created by an agreement. And if a partner is incapable of entering into a contract, he cannot become a partner. Thus, at the time of creation of a firm a minor (i.e., a person who has not attained the age of 18 years) cannot be one of the parties to the contract. But under section 30 of the Indian Partnership Act, 1932, a minor ‘can be admitted to the benefits of partnership, with the consent of all partners. A minor partner is entitled to his share of profits and to have access to the accounts of the firm for purposes of inspection and copy.
   He, however, cannot file a suit against the partners of the firm for his share of profit and property as long as he remains with the firm. His liability in the firm will be limited to the extent of his share in the firm, and his private property cannot be attached by creditors.
   On his attaining majority, he has to decide within six months whether he will remain regular partner or withdraw himself from partnership. The choice in either case is to be intimated through a public notice, failing which he will be treated to have decided to continue as a partner, and he becomes personally liable like other partners for all the debts and obligations of the firm from the date of his admission to its benefits (and not from the date of his attaining the age of majority). He also becomes entitled to file a suit against other partners for his share of profit and property.
7. Other partners: In partnership firms, several other types of partners are also found, namely, secret partner who does not want to disclose his relationship with the firm to the general public. Outgoing partner, who retires voluntarily without causing dissolution of the firm, limited partner who is liable only up to the value of his capital contributions in the firm, and the like.