Chapter 2: Forms of Business Organisation for Class11
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Chapter 2: Forms of Business Organisation
This chapter explains the different ways a business can be set up and run. Each form has its
own structure, rules, advantages, and limitations.
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1. Introduction
The form of business organisation means how a business is legally structured and managed.
The choice depends on factors like capital needed, liability, number of owners, and legal
formalities.
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2. Sole Proprietorship
Meaning:
A business that is owned, controlled, and managed by one person.
Features:
Single ownership: Only one person is the owner and decision-maker.
Limited capital: Funds are arranged by the owner from personal sources.
Unlimited liability: The owner is personally responsible for all business debts.
No separate legal entity: The law does not distinguish between the business and the owner.
Sole risk bearer: The owner enjoys all profits and bears all losses.
Merits:
Quick decision-making: The owner doesn’t need to consult anyone.
Complete control and secrecy: No need to share business information with others.
Easy to start and close: Very few legal formalities required.
Direct motivation: All profits go to the owner, which motivates them to work harder.
Demerits:
Limited resources: Only one person contributes capital, so growth is limited.
Unlimited liability: The owner’s personal property is at risk.
Lack of continuity: Business may stop if the owner falls ill or dies.
Limited managerial ability: One person may not have all the skills needed.
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3. Hindu Undivided Family (HUF) Business
Meaning:
A business owned and run by members of a Hindu Undivided Family, led by the Karta.
Features:
Membership by birth: Only male family members become part of the business by birth.
Control by Karta: The eldest male member (Karta) has full control over the business.
Limited liability of co-parceners: Only the Karta has unlimited liability, others’ risk is limited.
Continuity: The business continues even after the death of Karta, as the next eldest becomes
Karta.
Merits:
Efficient control: The Karta makes quick decisions based on his experience.
Continued business life: Business does not stop due to death of members.
Limited liability for others: Only one person is fully responsible for debts.
Loyalty and trust: All members belong to the same family and trust each other.
Demerits:
Limited capital and scope: Capital is limited to family savings, so expansion is difficult.
Dominance of Karta: Other members have no say in decisions.
No female co-parceners (as per older laws): Only males are included.
Possibility of conflicts: Family issues may affect business decisions.
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4. Partnership
Meaning:
A business owned and run by two or more persons who agree to share profits and losses.
Features:
Agreement: Partners enter into an agreement, written or oral, called the partnership deed.
Sharing of profits: All partners share profits and losses in a fixed ratio.
Unlimited liability: Each partner’s personal assets can be used to pay business debts.
Mutual agency: Each partner can bind the firm and be bound by other partners’ actions.
No separate legal entity: Law does not consider the firm separate from its owners.
Types of Partners:
Active partner: Takes part in daily business activities.
Sleeping partner: Invests money but does not take part in day-to-day work.
Nominal partner: Only lends his name; does not contribute capital or work.
Partner by estoppel/holding out: Acts like a partner or is known as one, so is liable.
**Merits
