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Class 11 - Business Studies

Forms of Business Organisations Test 01

Question No. 1 to 6 are based on the given text. Read the text carefully and answer the questions:

Sejal had recently completed her MBA. Her father, who was the eldest member of his family, wants her to help him in
his family business. But she had the opinion that this business form has limited scope for expansion. So, she was
thinking of starting a venture with a few of her friends. They gathered at Sejal's house to discuss the pros and cons of
doing a particular business. One of her friends suggested starting a partnership firm in which each of them contributes
and handles a particular area of their expertise. This will lead to good decision-making. But since the personal assets of
the partners can be utilised for repayment of the firm's loan in case the assets are insufficient, most of them don't agree.
Another friend recommended that they should choose that form of business in which they can have greater funds and
scope of expansion and at the same time limited liability. Everyone liked his idea and they finally started their business
in the next few months.

1. Which form of business was recommended by Sejal's father?

a. Partnership
b. Hindu Undivided Family Business
c. Sole Proprietorship
d. Joint venture
2. Which term is best suited for Sejal's father in the business he was a part of?
a. Karta
b. Partner
c. Owner
d. Coparcener
3. Which limitation of the business form has been mentioned in the above para?
a. Limited Resources
b. Limited managerial skills
c. Lack of secrecy
d. Unlimited liability
4. Identify one advantage of partnership firms mentioned in the above para.
a. Secrecy
b. Balanced decision making
c. All of these
d. Ease of formation
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5. Identify one limitation of the partnership firm mentioned in the above para.
a. Limited Resources
b. Lack of secrecy
c. Chances of Conflicts
d. Unlimited Liability
6. Which form of business organisation do you think Sejal and her friends started?
a. None of these
b. Company

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c. Partnership
d. Sole Proprietorship
7. A person contributes capital but does not take part in the day to day activities of the business is called ________.
a. nominal partner
b. active partner
c. sleeping partner
d. secret partner
8. Every partner is ________.
a. Both principal and agent of the firm
b. Only principal of the firm
c. None of these
d. Only agent of the firm
9. What are the main reasons behind the slow growth in the Size of Sole Proprietorship firms?
a. Unlimited liability
b. Limited resources
c. All of these
d. Limited managerial ability
10. Assertion (A): Producer’s cooperative societies help in selling the products of member producers.

Reason (R): Producer’s cooperative societies increase the bargaining power of the small producers.
a. Both A and R are true and R is the correct explanation of A.
b. Both A and R are true but R is not the correct explanation of A.
c. A is true but R is false.
d. A is false but R is true.
11. Assertion (A): The principle of ‘one man one vote’ governs the cooperative society.

Reason (R): Irrespective of the amount of capital contribution by a member, each member is entitled to equal voting
rights.
a. Both A and R are true and R is the correct explanation of A.
b. Both A and R are true but R is not the correct explanation of A.
c. A is true but R is false.
d. A is false but R is true.
12. State True or False:
a. A private company can commence business after incorporation.
a. True
b. False
b. An agreement which specifies the terms and conditions that govern the partnership is known as partnership deed.
a. True
b. False
13. Fill in the blanks:
a. In Private Sector Enterprise the capital is contributed by the owner and/or by the ________ investors.
b. The maximum number of members in a public company is ________.
14. How is the risk of loss spread over a large number of shareholders?
15. Discuss whether a company's existence is affected by the death of one of its member.
16. Sumit is running an auto repair garage. He now wants to expand his business. He invests all his savings and is still short
of Rs. 2 lakhs. Banks and other lending institutions refuse to give loans as they are predicting the instability associated
with this form of business organisation.

In the context of the above case:

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a. Identify the related demerit of sole proprietorship form of business organization.
b. How the financing problem can be solved if this form of business is converted to partnership?
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17. The promoter is not a trustee of the company, but he stands in a fiduciary relationship. Comment.
18. Ankit, Kishore and Shivam are partners in a partnership firm manufacturing Water Coolers. Recently, Shivam entered
into a contract with Mayank for purchase of raw material worth ₹10,00,000 without the knowledge of Ankit and
Kishore. Now, Mayank is asking for the payment and Ankit and Kishore are of the view that only Shivam is liable to
make the payment and they cannot be held liable. Are they correct in refusing the payment? State the related feature of
the partnership form of business organisation.
19. Distinguish between Memorandum of Association and Articles of Association.
20. Discuss the stages in the formation of a company.

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Class 11 - Business Studies

Forms of Business Organisations Test 01

Solution

1. (b) Hindu Undivided Family Business

Explanation: Hindu Undivided Family Business

2. (a) Karta

Explanation: Karta
3. (a) Limited Resources

Explanation: Limited Resources

4. (b) Balanced decision making

Explanation: Balanced decision making

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5. (d) Unlimited Liability

Explanation: Unlimited Liability

6. (b) Company

Explanation: Company
7. (c) sleeping partner

Explanation: A sleeping partner may not contribute to business decision making but is bound by acts of all other
partners. He has unlimited liability in the business.
8. (a) Both principal and agent of the firm

Explanation: Both principal and agent of the firm.

9. (c) All of these

Explanation: All the options given above are some of the disadvantages of running a Sole Proprietorship firm. No firm
can grow if resources are in less supply and also due to lack of managerial abilities. More so, if the losses are high, a
single owner has to bear the complete burden which makes it even more challenging to sustain the firm in the long run.  
10. (d) A is false but R is true.

Explanation: Marketing cooperative societies are established to help small producers in selling their products.
Producer’s cooperative societies help in procuring inputs at lower costs by the member producers.
11. (a) Both A and R are true and R is the correct explanation of A.

Explanation:

Cooperative Societies follow the principle of "One Man, One Vote" i.e. all members have equal voting rights irrespective
of the amount of capital contribution.

12. State True or False:

a. (a) True

Explanation: True
b. (a) True

Explanation: True
13. Fill in the blanks:
a. Private
b. No Limit

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14. The risk of losses in a company is borne by all the shareholders. In the time of financial difficulties, all shareholders have
to contribute to the debts to the extent of their share in the company's capital, thus the risk gets divided amongst a large
number of shareholders.
15. No, because of perpetual existence where a company is not affected by the death, retirement, resignation, insolvency or
insanity of its members as it has a separate entity from its members. A company will continue to exist even if all the
members die. It can be liquidated only as per the provisions of the Companies Act, 2013.
16. a. The limited life of a business is the demerit associated with sole proprietorship form of business as the life is solely
dependent on the physical and financial health of the owner. 
b. If Sumit converts his sole proprietorship business to a partnership firm, the financial problem could be solved. This is
due to the fact that additional capital will be contributed by the incoming partner(s). Thus, it enables pooling in of
financial resources in the firm.
17. The given statement is true. Promoter stands in a fiduciary relationship, i.e. relationship of utmost faith with the
company he is promoting. He should not misuse his position, i.e. he should not carry out any activity which is against the
interest of the company. For example, he should not make any secret profits in the dealings, and if he makes, then such
profits should be disclosed.
18. No, Ankit and Kishore are not correct in refusing the payment. They too are liable along with Shivam. According to the
Indian Partnership Act, 1932, partnership business is carried on by all or any one of the partners acting for all. It means
every partner acts in the capacity of an ‘agent’ as well as a ‘principal’.
As an agent, he represents other partners and thereby binds them through his acts.
Asa principal, he is bound by the acts of other partners.

The related feature highlighted in the given example is: ‘Mutual Agency’.

19. Memorandum of Association Article of Association

Importance: It has primary importance in the formation of a It has secondary importance in the formation of the
company. company.
It contains rules which govern the administration of the
Constitution: It is the constitution of the company.
company.

It contains the procedure of achieving objects. The

Object: It lays down the objects of the company. provision can be changed by the special resolution
easily.

Alternate: It is not alterable but it can be amended by special Articles of Association can be amended by a special
resolution and sanction of the court or central government. resolution.
Relation: Its nature is like a contract between the company It maintains the relationship between the company and
and outsiders like bankers and creditors. the persons inside the company.

The Registration of Articles is optional for the

Regulation: It contains rules which govern the administration
company limited by shares. It may adopt all or

of the company.
any regulations.

Nature of Document: It does not allow the company to act It is a subsidiary document to the Memorandum of
against the company ordinance. Association.
Limits: This document determines the limits of the company
Business limits are not mentioned in it.
business.
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papers with their own name and logo.
20. The various stages involved in the formation of a company are:
i. Promotion: Promotion is the first stage in the formation of a company. Both a Private company and a Public
company has to go through this stage. It involves conceiving a business opportunity and taking an initiative to form a
company so that practical shape can be given to exploiting the available business opportunity. The main functions of
a promoter are the identification of business opportunities, conducting feasibility studies, filing name approval form,
fixing up Signatories to the Memorandum of Association, the appointment of professionals and preparation of
necessary documents.
ii. Incorporation: Incorporation is the second stage in the formation of a company. Incorporation means the registration
of the company under the Companies Act, 2013 or any previous Company Law. After the registrar approves the
name, the promoter can proceed with the following steps for the incorporation of the Company:
a. Filing of Documents
b. Payment of Fees
c. Certificate of Incorporation
iii. Capital Subscription: Capital Subscription is the third stage in the formation of a company. Only a Public company
has to go through this stage. The steps included are:
a. SEBI Approval
b. Filing of Prospectus or Statement in Lieu of Prospectus
c. Appointment of Bankers, Brokers, and Underwriters
d. Minimum Subscription
e. Application of Stock Exchange
f. Allotment of Shares
iv. Commencement of Business: Commencement of Business is the fourth and last stage in the formation of a
company. Only a Public company has to go through this stage. After the amount of minimum subscription is raised
through the new issue of shares, a public company applies to the Registrar of Companies for the issue of Certificate
of Commencement of Business to legally start doing business.

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